Buy Out or Sell Up?

AuntyJean

I am about to buy out my share of the marital home (50%) and was considering a Buy To Let mortgage. I am living with my new partner so can let the 'marital home' out.

Having looked at all the costs (income tax, management costs, insurance, annual gas checkes etc.) I am now wondering if I would be better of just selling the house and sticking the cash into some sort of long term investment.

I will be 50 in October and pay basic rate income tax. I intend to work until I am 65 (health allowing).

Is there any financial expert out there that could take into account all the tax implications (house value is £130,000) of buy to let and mortgage costs over the next 15 years -v- investing the cash of £65,000. I envisage having to renew items in the btl house every 7 years or so (new bathroom, kitchen, carpets etc.) so that is going to have to be considered.

I can only afford to pay off the interest and would be looking to sell the property at the end of the 15 mortgage to pay off the capital.

Any suggestions would be appreciated.

(Have to discuss the mortgage on Monday)

Bossyboots

Aside from the financial aspect, have you considered the hassle letting might bring. You might be really lucky and always have good tenants or you might find the opposite. I think you need to weigh up how the letting might disrupt your life, particularly as you approach retirement and may not want the added burden. My colleague has been lucky with her current tenants although there are regular telephone calls for her to arrange to fix this and fix that, replace the washing machine or such like. Her previous tenants left the house in a bit of a state and then sued her for the return of their deposit, even though she had had to spend it on professional cleaning and changing the curtains which they had managed to ruin. They backed off once she filed a defence and made it clear she would be prepared to fight in Court but it was still stressful. The previous tenants in the flat my son rented left without paying the bills for the time they were there so the landlord had that hassle as well.

I don't mean to be negative about the letting idea, just thought it wise to suggest that you consider other factors before making a decision.

AuntyJean

Having taken this into consideration I was going to let a Letting Agent do all the work. Even though they will be taking approximately 10% of the income, it would be worth it not to have the hassle.

Bossyboots

AuntyJean wrote:

Having taken this into consideration I was going to let a Letting Agent do all the work. Even though they will be taking approximately 10% of the income, it would be worth it not to have the hassle.

That would be a good idea. I asked my colleague why she didn't do that, but they had been advised it was tax efficient to do it themselves as they could claim tax back for her keeping the accounts.

I'm with you on this one though, I would rather the agent had the hassles and some of the money.

EdInvestor

Hi Aunty Jean,

How much would the property rent for?

It would be sensible to work out the "yield" - the annual rent after expenses as a percentage of the value of the property.

If this figure is anywhere near what you would get in a hassle free savings account, you'd probably be better to sell and invest elsewhere, as property is not expected to generate major capital gains for the next few years - and indeed values could fall.

AuntyJean

This is where it does my head in and I need a financial wizard to work things out.

I believe I could get approximately £500+ per month. I will be letting the property fully furnished.

If I let through a Letting Agency they would take 10% but may increase the rent to cover this. For example, I may get £500 but a letting agency may get £550 therefore 10% of £550 would all but pay for their fee.

If the interest only repayments are £430 per month (overall over 15 yrs) that would leave me only £840 to cover all other costs such as maintenance, annual gas checks, house buildings and part contents insurance (plus public liability) which will be higher as I am letting the property, and accountants fees (and solicitors if necessary).

Whilst most of these are subject to tax relief it will simply mean I will not have to pay income tax on the profit as looking at this I will probably be making a loss.

This is the bit I don't fully understand and, as I do not have any spare cash I could not afford any reduction in my income.

That is why I am seeking advice from those that have 'been there, done that' or have knowledge in the field of tax/buy to let income.

Using very rough calculations I calculate the following:-

Item Monthly Annual
Income £550 £6,600
Letting Agency £55 £660
Interest Repayments (est) £400 £4,800
Annual Gas Check £450
Insurance (annual) £400
Other fees (annual) £500
New Kitchen £857.14 £6,000
New Bathroom £428.57 £3,000
Carpets throughout £285.71 £2,000
White Goods £228.57 £1,600
Furniture £1,428.57 £10,000
Paint & paper £142.86 £1,000
Smaller inventory items £428.57 £3,000
Total Annual £10,610.00
Profit -£334.17 -£4,010.00

(first figure is monthly cost based on average costs at todays prices, second is annual)

Therefore I am going to have to find an extra £335 per month which I cannot afford. However, at the end of 15 years I will have a property worth approximately £250,000 or more with only £80,000 to pay off so, the balance will be mine. If I invested £65,000 and invested the £335 it is going to cost me to let out the property, would I be better off?

Have people successfully let out their property at less costs or am I under budget?

sleepless_saver

Sorry to complicate things further, but you will also need to think about the capital gains tax implications. If you sell the house now, you will pay a lot less CGT - possibly none at all - than if you sell it after 15 years.

AuntyJean

Presumably, the threshold on CTG will be increased after 15 years so would probably be in same position?

Pheno

500 pounds per month on a 130k investment is a return of 4.61% before all the extra costs are added in. You can get better than this from a bank account so my *non-expert* opinion is that buy to let would not be a good investment.

sleepless_saver

AuntyJean wrote:

Presumably, the threshold on CTG will be increased after 15 years so would probably be in same position?

I don't think so. It looks to me as if there is an exemption for up to 3 years after you move out of marital home following marriage breakdown, but after that you could be liable for the full whack for it not being your main residence, plus increase in its value over the 15 years. But I'm not an expert on this - do check it out.

YorkshireBoy

AuntyJean wrote:

Therefore I am going to have to find an extra £335 per month which I cannot afford. However, at the end of 15 years I will have a property worth approximately £250,000 or more with only £80,000 to pay off so, the balance will be mine. If I invested £65,000 and invested the £335 it is going to cost me to let out the property, would I be better off?

Doing as you say will generate a "pot" of around £198K* after 15 years.

* Basic rate tax payer, ING Direct savings account, interest rate remaining at 5% AER for next 15 years.

This figure would be more if you made use of your, and your new partner's, ISA allowances (guaranteed to be around for the next 5 years or so, and something you possibly couldn't afford to do if you went for the BTL).

It's your call, but I wouldn't go the BTL route (given your circumstances).

HTH
YB