Where to put my money, buying a new house and renting out my flat.

ParkerManc

Hello,

This is likely to be a long read, I appreciate the time you may spend reading it. 

We have lived in our 1 bed flat for 3 and a half years(2 x 2year fixed, deal ends in July).
Purchased at £172k with the aid of HTB 20 percent loan and a tiny 5 percent deposit. 
Now worth £190-200k.

We have since had a baby who is now 6 months old, and the flat is quickly becoming too small.

We have found a house not too far away at £360k, though it needs another £80k spending to modernise/bring it up to my standard. It's a 2 bed 1930's semi in a nice area of Cheshire. The house next door just sold for £550k, albeit with a nice wraparound extension and a turnkey house.

The house purchase will be funded by my income for the mortgage(I'm freelance, my wife doesn't work at the moment to look after the baby), and the deposit/stamp duty/do up costs/paying off HTB to keep the flat will come from my wifes inheritance of £160k, which is coming from her brother buying her out of the family home, he is to rent that out himself. 

Alot of money is being spent, and I just want to sense check my decision making with people who are more experienced with these things.

The house purchase side of things is relatively simple, we have an AIP, and the deposit funds will clear when the inheritance home deal goes through. 

Renting out the flat is where I'm struggling. I'd have to pay back the HTB loan to rent it out, so there's potentially £40k gone in cash, plus the up-tick in stamp duty as I'd then have 2 properties.

A BTL mortgage would cost around £750 on the flat, and it would rent out for around £1100-1200pcm. Minus tax, and minus a service charge of around £100pcm, and the flat doesn't look like it will turn much of a profit at all. 

Being freelance, the idea of a property being my pension appeals(still 40 years off), as does a secondary income to help pay off what is likely to be a £2k mortgage on the new house. 
But if it's not going to make much money, and take a long time to earn back the stamp duty, and add on top the initial £40k HTB cost(I know this is instant equity), is it actually a good idea?


Any thoughts or options on the situation are hugely appreciated. I want to do the best for my family, and opportunities to invest this amount of cash are potentially once in a lifetime.

Thank you. 

propertyrental

You'ren not going to have much income from the BTL, and a degree of stress and risk.

"the idea of a property being my pension appeals" but there are other ways to buil up a pension, and they are much more tax efficient. The gov will actually pay you rather than tax you.

Go over tpo the savings/investment board for more advice,

gwynlas

There are all sorts of potential risks with a BTL  the least of which is void periods and potential for expensive repairs. I would say that it would only be worth keeping if there is likely o be large capital growth. Whilst BtLs are okay if you have a significant porfolio and work on the economies of scale the percentage yield on one is not worth the hassle. You would possibly be better off looking seriously at your future pension provision or if you are determined on  BTL start purchasing ones in areas that offer a high yield.ie nearer 10%

Albermarle

propertyrental said:

You'ren not going to have much income from the BTL, and a degree of stress and risk.

"the idea of a property being my pension appeals" but there are other ways to buil up a pension, and they are much more tax efficient. The gov will actually pay you rather than tax you.

Go over tpo the savings/investment board for more advice,

Or the Pensions Board.
Pensions, annuities & retirement planning — MoneySavingExpert Forum

Pension contributions are a bit of a no brainer for employees, due to the employers contributions. For the self employed though you still get tax relief on contributions.

"the idea of a property being my pension appeals"
This line gets regularly trotted out on Homes under the Hammer. I think BTL still works despite the less generous tax regime nowadays, as long as you can do a lot of the work yourself and are a good DIYer, or even better in the building trade.
Otherwise seems a lot easier to me to just invest via a pension, and occasionally check it from your computer. 

ParkerManc

Thank you everyone. I'd say the flat is in a potentially good position for capital growth(central Altrincham, where prices seem to be going up as the town becomes more and more popular). It's also in very good condition, and is small, so potential repairs and maintenance much cheaper than an admittedly higher yield 2 up 2 down north of Manchester.

I'm not sure that swings it in the favour of being a good idea or not, but we'd certainly like a secondary income/investment in the background. 

I'll take a look at what our equity would be in the flat should we sell, if it's only 15k or so, it doesn't make a huge difference to us right now. 

RHemmings

If the house needs £80K work doing on it, and you need a mortgage on that house, then in reality/the end the improvements to the house are not costing you £80K. Because if you bought something that you don't need to bring up to standard then you would have £80K less mortgage and wouldn't be paying the interest on that. 

ParkerManc

RHemmings said:

If the house needs £80K work doing on it, and you need a mortgage on that house, then in reality/the end the improvements to the house are not costing you £80K. Because if you bought something that you don't need to bring up to standard then you would have £80K less mortgage and wouldn't be paying the interest on that. 

Thanks for your reply. I'm not sure I understand though? To buy something that doesn't need bringing up to standard in the same area, would cost 10's of thousands more than the £360k purchase price plus £80k in renovations.

I'm not paying £80k in renovations from the mortgage, that's interest free cash. 

GDB2222

If you sell the flat, you'll end up with roughly £200k less borrowings. (That's £10k less SDLT and you'll have paid off the loans on the flat, and have the use of any equity.)  I guess this depends on your appetite for risk.

Do you have plenty of life assurance and long term sickness insurance?

AlexMac

I’ve had good experiences with my  two SE London little BTLs owned for 25 years and 14 years respectively. But as they cost peanuts (£34k and £153k) the capital gain has been colossal! 

However you’ve got to be ready to replace boilers (2-3k), fixtures (averaging up to £1k) and if it’s a leasehold to pay freeholders for things like external dec (£2-3k) and replacement windows (£4-5k), sometimes at short notice. I’ve also had to do a really expensive kitchen refit as the original was wrecked. 

If you’re OK with that , get into BTL.

personally I now would’t bother  as I can’t see capital growth in the next 30 years equalling the stellar growth of the late 20th Century and noughties?

_Penny_Dreadful

I’d forget about keeping the flat as a BTL, the figures you’ve quoted don’t make it sound like a great investment, and I’d probably look at buying a larger main residence. 1-bedroom flat to a 2-bedroom house, my guess is that as you’ll quickly outgrow the 2-bedroom semi. If, after considering pensions and other investment vehicles, you’re still hellbent on BTL then it doesn’t have to be the 1-bedroom flat just because you already own it. Look for a property that will give you the most bang for your buck. 

What are these renovations that will cost £80,000? 

markin

If you could let for £1800 i would say let it, but not for £1200, You would be relying on its growth that may not happen, and 1 beds are hard to sell anyway.

Your more likely to out grow the new 2 bed, That may make a far better rental.