Considering purchase and letting a flat

collinsca

Hi All

My wife and i are considering purchasing and letting a flat. We are total newbies to this and would appreciate some advice to see if this is something worth proceeding with or not!

The circumstances are:
-We are in our mid 40s and are coming into an inheritence of about 140k
-We are close to mortgage free (about 5k to go)
-We live in a block of freehold flats where people either own and live or own and rent.
-A flat is not yet for sale, but they come up reasonably often (hence we are researching early)
-We live in a flat on the top floor, and a flat we are keen to get would be on the Ground floor (for long term future proof purposes (!) should we want to move in to it long term)
-The flats currently sell for between 140-150k (so we would need a very small mortgage) rent for between £700-750 per calendar month.

Our main reasons for considering this are:
-Long term investment purposes.
- As mentioned, we may want to move in long term.

Any advice appreciated!


Many thanks!

sammyjammy

Don't do it, definitely don't do it with a flat in your block.

collinsca

sammyjammy said:

Don't do it, definitely don't do it with a flat in your block.

Thanks for commenting.
Why do you say not to do it? and also, why do you say not to do it with a flat in our block? thanks

tacpot12

One thing to consider is that Section 21 of the Housing Act 1988 is likely to be repealed. It is this section that allows landlord's to evict tenants when the tenant hasn't done anything wrong (aka "no fault evicitions). If this change does make it through Parliament, you would not be able to evict your tenants just because you wanted to move into the ground floor flat.

You would have to wait for the tenant to leave, or you would need one of the grounds allowed by Section 8 of the Housing Act 1988. The way around this is to move into the ground floor flat as soon as you have bought it, and rent out your current flat. It won't be as attractive to tenants, but if Section 21 is repealed you might have to wait a long time for one of the grounds that would allow you to evict the tenant using Section 8.

I suspect that the suggestion not to rent out a flat in your own block is because the tenant can "pop round" to report the blocked sink, the failed boiler and the mould in the bathroom. Sometimes a bit of distance can be a good thing. 

There is also an argument that your are putting all your investments "eggs" into one basket. If the block has a problem, it will cost you double, whereas a flat in a different block might have its own problems, but they are less likely to happen at the same time as any problems in your block.

You might not need a mortgage; if you could potentially get an unsecured personal loan for a few thousand. 

But being a landlord means that you are running a business, and you will need to be business like.  

steampowered

Please don't just automatically think you should get into buy-to-let. Please spend the time to research the other options out there so that you can make an educated decision. Especially think about topping up your pension or opening stocks & shares ISAs. 

Topping up your pension could be a really good idea. Pension contributions attract tax relief. So, if you and hubby are basic rate tax payers, the government will top up your £140,000 by 20% to £168,000. If you are higher rate tax payers, the top-up is 40%, giving you £196,000 in your pension.

In addition, pensions are stocks and shares investments which grow by about 6-7.5% year on average. So, you would expect your £168k or £190k to keep growing.

That is going to be far, far, far better than any return you will be able to get via buy-to-let, especially if you are only taking a small mortgage.

There are limits on how much you can put into a pension each tax year so you may need to split your contributions over more than one year.

Pros of stocks and shares:
- Very easy and quick
- You can now invest in funds (like Vanguard funds) which invest across the entire stock market, so you don't need to worry about selecting winners or worry about individual companies going bust.
- You can release your money at any time - in whole or in part.
- Very attractive returns. The stock markets typically return 7.5% per year on average.
- If investing via a stocks & shares ISA, returns are completely tax free.

Pros of pensions:
- All of the pros of stocks & shares, plus you get tax relief.

Cons of pensions:
- Unable to access the money until retirement age.

Pros of buy-to-let:
- Possible to increase your returns by taking lots of debt (you are not planning to do this so that doesn't help you)

Cons of buy-to-let:
- Higher rate stamp duty
- You will need to file a tax return and pay income tax on the rent you receive 
- Conveyancing fees, mortgage fees, letting agent fees
- Possibility of being unable to get the property back if you get bad tenants
- Unable to realise part of your investment; you can't sell a share of a property; you can only sell in full

collinsca

tacpot12 said:

One thing to consider is that Section 21 of the Housing Act 1988 is likely to be repealed. It is this section that allows landlord's to evict tenants when the tenant hasn't done anything wrong (aka "no fault evicitions). If this change does make it through Parliament, you would not be able to evict your tenants just because you wanted to move into the ground floor flat.

You would have to wait for the tenant to leave, or you would need one of the grounds allowed by Section 8 of the Housing Act 1988. The way around this is to move into the ground floor flat as soon as you have bought it, and rent out your current flat. It won't be as attractive to tenants, but if Section 21 is repealed you might have to wait a long time for one of the grounds that would allow you to evict the tenant using Section 8.

I suspect that the suggestion not to rent out a flat in your own block is because the tenant can "pop round" to report the blocked sink, the failed boiler and the mould in the bathroom. Sometimes a bit of distance can be a good thing. 

There is also an argument that your are putting all your investments "eggs" into one basket. If the block has a problem, it will cost you double, whereas a flat in a different block might have its own problems, but they are less likely to happen at the same time as any problems in your block.

You might not need a mortgage; if you could potentially get an unsecured personal loan for a few thousand. 

But being a landlord means that you are running a business, and you will need to be business like.  

Some very valuable points Thanks for taking the time to respond.

collinsca

steampowered said:

Please don't just automatically think you should get into buy-to-let. Please spend the time to research the other options out there so that you can make an educated decision. Especially think about topping up your pension or opening stocks & shares ISAs. 

Topping up your pension could be a really good idea. Pension contributions attract tax relief. So, if you and hubby are basic rate tax payers, the government will top up your £140,000 by 20% to £168,000. If you are higher rate tax payers, the top-up is 40%, giving you £196,000 in your pension.

In addition, pensions are stocks and shares investments which grow by about 6-7.5% year on average. So, you would expect your £168k or £190k to keep growing.

That is going to be far, far, far better than any return you will be able to get via buy-to-let, especially if you are only taking a small mortgage.

There are limits on how much you can put into a pension each tax year so you may need to split your contributions over more than one year.

Pros of stocks and shares:
- Very easy and quick
- You can now invest in funds (like Vanguard funds) which invest across the entire stock market, so you don't need to worry about selecting winners or worry about individual companies going bust.
- You can release your money at any time - in whole or in part.
- Very attractive returns. The stock markets typically return 7.5% per year on average.
- If investing via a stocks & shares ISA, returns are completely tax free.

Pros of pensions:
- All of the pros of stocks & shares, plus you get tax relief.

Cons of pensions:
- Unable to access the money until retirement age.

Pros of buy-to-let:
- Possible to increase your returns by taking lots of debt (you are not planning to do this so that doesn't help you)

Cons of buy-to-let:
- Higher rate stamp duty
- You will need to file a tax return and pay income tax on the rent you receive 
- Conveyancing fees, mortgage fees, letting agent fees
- Possibility of being unable to get the property back if you get bad tenants
- Unable to realise part of your investment; you can't sell a share of a property; you can only sell in full

Some very valuable points. Thanks for taking the time to respond.

collinsca

Some very valuable inputs; thanks again.

Certainly alot to think about!

Gut feel is BTL seems more effort for little reward compared to other options.
The only benefit in my particular case is that at the end we plan to have a groundfloor flat to move into. But even then Section 21 may halt that.

ukri

I wouldn’t even consider BTL without leverage, what’s the point. 

GaleSF63

collinsca said:

Hi All


-We live in a block of freehold flats where people either own and live or own and rent.

Are you in Scotland? I believe some of the rules on notice/eviction etc. are different.

Crashy_Time

I wouldn`t rent a property with the landlord in the same block, far too potentially intrusive, and the flip side is that people who might rent it will soon be banging on your door when they want repairs done plus all the legalities and tax etc. make this a shocking idea for 140k nowadays. As someone said go for a Vanguard or similar account, I prefer to track individual stock markets rather than use the "blended" funds though, as I think you can target buying opportunities in a specific region that may crop up better that way. If you want a ground floor buy a ground floor and stay clear of the BTL game IMO.