Rental property - sell vs Rent

mikeylpool

Hi All, 

I'm going to apologise in advance if this post comes across a bit "rambley". 

My situation is this:

We (me and the OH) currently have a property that we rent. We retained the house I previously lived in (before my current residence) to use as a rental property and it has so far gone very well - 10.5 years with the same tenants, no issues at all during this time, and so far very little maintenance required.  When we moved we got a remortgage on that property to use as a down payment on the new one - the main incentive at the time was a quicker move, and some backup plan if things with the new place went TU (I was going from having 0 mortagage to having what I felt at the time was a high monthly payment). In addition - also as an "investment" - however we were aware that the property was unlikely to grow in value so the investment would be a long term one basically as the tenant paid the mortgage on that property then we're getting "profit" from it. Also worth noting is that we've kept rent modest and largely unchanged to avoid rocking the boat with the tenant as I believe the tenant might leave which opens up a world of pain there and fees (and mortgage repayments have never increased).  So nutshell is that over any calendar year, we' don't really make a lot of profit from the rental, so I see this more as the house paying for itself really. As I say, this was about a more "long term" investment - i.e. at some point we can sell up and get a lump sum.

Over the past few months I have been questioning the soundness of the perceived benefit and started to question whether we should sell (i.e. if it is a better financial decision to sell up now). 

Profit on the house right now would be around 50K (before CGT) and this wouldn't be enough to pay off current mortgage  but I would use any money to pay lump sum off existing mortgage (would give us about 1/3rd),.  There's 14 years left (on the rental) and at that point I would estimate worth to be around 90-100K unless things massively change in the property market.

I'm trying to weigh up the benefit of having say 90K in 14 years Vs the current benefit of lump sum payment on residential mortgage and the reduction in paid interest (cost of around 3000 pa in interest payments which of course will go down over time) + any major costs that may well (almost certainly will) rise on the rental property over the coming years (e.g. most certainly a new kitchen in the coming years). My gut feeling is that now is the time to sell up and take the money, but don't know where I could start to do the maths on which is the better financial decision.

If anyone has made any decisions like this, or if you haven't and you have thoughts, this any comment would be appreciated.

Again, I apologise for the rambling nature of this, and appreciate there is a lot to consider in decisions such as this.

LegallyLandlord

Accountants would do a comparative discounted cash flow analysis to see which would leave you better off, but the problem with these is that they’re based on assumptions (aka guesses) of future interest rates and rents. 

I would question why you have never put up the rent in 10 years. The rent should track the £50k increase in the value of the property so your yield stays the same. You should also allow at least 10% for maintenance.  With inflation, it is reasonable to put it up. Just do it gradually to avoid rent shock (which the tenant will get in any event  if they look to move). 

I wouldn’t worry about finding tenants. It’s actually easy to find tenants at the moment, as there is a shortage of rental properties, and you can even avoid fees by doing it yourself on (say) Openrent (see https://theindependentlandlord.com/how-to-find-renters-without-agents/)

Do you manage it yourself? That’s another way to increase your profit. With long term tenants there won’t be much to do anyway, and you can save yourself 10-15% of the gross rent by self-managing. Here are some tips on self-managing: https://theindependentlandlord.com/self-managing-rental-properties/

If the tenant does leave, after 10 years you’re bound to need to redecorate the house, unless you’ve been doing it all along. Do also factor in improving the property’s energy efficiency. 

Hope that helps. 

mikeylpool

LegallyLandlord said:

Accountants would do a comparative discounted cash flow analysis to see which would leave you better off, but the problem with these is that they’re based on assumptions (aka guesses) of future interest rates and rents. 

I would question why you have never put up the rent in 10 years. The rent should track the £50k increase in the value of the property so your yield stays the same. You should also allow at least 10% for maintenance.  With inflation, it is reasonable to put it up. Just do it gradually to avoid rent shock (which the tenant will get in any event  if they look to move). 

I wouldn’t worry about finding tenants. It’s actually easy to find tenants at the moment, as there is a shortage of rental properties, and you can even avoid fees by doing it yourself on (say) Openrent (see https://theindependentlandlord.com/how-to-find-renters-without-agents/)

Do you manage it yourself? That’s another way to increase your profit. With long term tenants there won’t be much to do anyway, and you can save yourself 10-15% of the gross rent by self-managing. Here are some tips on self-managing: https://theindependentlandlord.com/self-managing-rental-properties/

If the tenant does leave, after 10 years you’re bound to need to redecorate the house, unless you’ve been doing it all along. Do also factor in improving the property’s energy efficiency. 

Hope that helps. 

Thank you for the reply, very much appreciated. I will have a go at some maths on my side and then look at professional help.

I think my outlook on this hasn't been "business" minded, so in response to the question about not putting up the rent this was simply because my outgoings hadn't changed (fixed term product on the mortgage) and to avoid rocking the boat with the tenant. Early on we had a tenant who came and went in 6 months and thankfully the next one came in right away and has been there for the >10 yrs. At the time I really didn't want to be going through that every few months. It's not so much about the not getting a tenant it's the perhaps 1 month (or more) being empty, the cost of redecoration, getting the tenant in (though I'll read your links above) etc all mean that it could be more expensive rather than someone who generally isn't giving me any grief (example, some maintenance issue came up a few months back which was the first issue in years).

I do think though that over the coming year I will discuss an increase with them.

My mind isn't so much on the actual profit from the rent, it's whether selling and paying off a lump of my residential mortgage is financially a better decision rather than hanging on to the BTL property and then it being worth X once the BTL mortgage is paid off (in terms of interest saved Vs lump sum available off the BTL later down the line).

LegallyLandlord

It’s actually hard to figure out the maths as the calculations are based on assumptions. We don’t know what future interest rates will be. We don’t know how much your rental will increase in capital value. Therefore, you make assumptions. 

Here’s a link to doing discounted cash flow calculations which take into account the time value of money (this means the impact of the cost of capital, or the “discount factor”). https://www.investopedia.com/terms/d/dcf.asp

You’re currently taking a “cost plus” approach, whereas rents should be linked to the local rental market. Otherwise you are effectively reducing the rent year on year in a period of high inflation. 

Rent increases should be considered each year if the market rent has gone up. I tend to increase mine by less than inflation (this year I did 2%, but in Covid I didn’t increase them for 2 years), but it means the return does slowly increase over time by an amount that won’t cause hardship. My renters were relieved at only 2% when the local market had gone up by 10%. 

Being a successful landlord means running it like a business. Otherwise you’ll get to the point where you’re running the rental at a loss. 

A month’s loss of rent for a void is easily made up in you increase the rent in line with the market when someone leaves. I have another tenant paying £1,300 pcm. I know the local market is £1,500 pcm. When they leave, I will make up the difference in 6 months and after that it compounds. I plan to increase the rent by 2% next year if they stay, which will bring it to around £1,325. Still less than £1,500, but that increase will pay for the gas safety certificate and leave a little over for maintenance. And the following year I’ll do the same. It’s not so much to make someone leave, but helps maintain the yield (the yield is calculated on the current value of the property, not the original value). 

Redecorating between tenants needn’t cost a lot and is tax deductible. It will help you get a better rent and makes the place nicer to live in. 

If you don’t feel comfortable running it like a business, maybe you should sell, but the timing now won’t get you the best return as prices have dropped, and you’re unlikely to complete in time for the new tax year, when the CGT rates are higher. 

sammyjammy

Have a look at rents in the area and consider how much of an increase would be needed to keep it reasonable in comparison.  Let the tenant know your plans and then send official notification.

Whilst you have this tenant I don't know why you wouldn't keep renting it out.  If they should leave you can make the decision then.

mikeylpool

sammyjammy said:

Have a look at rents in the area and consider how much of an increase would be needed to keep it reasonable in comparison.  Let the tenant know your plans and then send official notification.

Whilst you have this tenant I don't know why you wouldn't keep renting it out.  If they should leave you can make the decision then.

This definitely has been my mindset up to the last few months.

My OH would love just to get shut of it really and I'd had that thought like you just mentioned (i.e. let's re-assess if they leave).  They're basically treating it as a home, they're doing decorating (interior anyway) themselves etc. They've not really come asking me for anything (e.g. contributions to reecorating costs) unless something breaks.

mikeylpool

@LegallyLandlord Thanks for that reply. All very good and definitely food for thought.

_Penny_Dreadful

Whilst you have an easy going tenant I’d be inclined to keep the BTL. If you haven’t increased the rent in 10 years then even a modest, below in flatiron increase, is still going to make that the cheapest place the tenant can rent. I’m surprised than none of your costs have gone up since you started letting the property but what about your other costs as a landlord like insurance? There will also come a time when larger maintenance issues start to arise. 

mikeylpool

_Penny_Dreadful said:

Whilst you have an easy going tenant I’d be inclined to keep the BTL. If you haven’t increased the rent in 10 years then even a modest, below in flatiron increase, is still going to make that the cheapest place the tenant can rent. I’m surprised than none of your costs have gone up since you started letting the property but what about your other costs as a landlord like insurance? There will also come a time when larger maintenance issues start to arise. 

Hi @_Penny_Dreadful. Yeah to be honest not much has really increased. Insurance has gone up about 60 quid over the 10 years, and mortgage payment per month decreased (due to the interest rates at the time). I'm on a fixed product until 2026.

Definitely going to hit some bigger things over the coming year or 2 - likely kitchen (which is >20yrs old) and bathroom. This is partly the reason I've had a change in mind, and got my gut feeling that selling up might be the better financial decision (but obviously would need the analysis).

_Penny_Dreadful

mikeylpool said:

_Penny_Dreadful said:

Whilst you have an easy going tenant I’d be inclined to keep the BTL. If you haven’t increased the rent in 10 years then even a modest, below in flatiron increase, is still going to make that the cheapest place the tenant can rent. I’m surprised than none of your costs have gone up since you started letting the property but what about your other costs as a landlord like insurance? There will also come a time when larger maintenance issues start to arise. 

Hi @_Penny_Dreadful. Yeah to be honest not much has really increased. Insurance has gone up about 60 quid over the 10 years, and mortgage payment per month decreased (due to the interest rates at the time). I'm on a fixed product until 2026.

Definitely going to hit some bigger things over the coming year or 2 - likely kitchen (which is >20yrs old) and bathroom. This is partly the reason I've had a change in mind, and got my gut feeling that selling up might be the better financial decision (but obviously would need the analysis).

Say you decided to sell, that will probably mean evicting the tenant.  Are you confident that all the correct paperwork is in place to issue a valid Section 21?