To Sell Or Not To Sell?

getmore4less

James post seems to rely on some fairly impresive growth rates that are not likely to be seen for some time.

Property is likely to be negative or stagnent for the next few years.
Equities have just taken hit so for many the returns over the last year or two have been wiped out more 0% growth.

Will have a look at his numbers in detail if I get time.


One thing you have to consider is do you want to be a landlord even with agents it can be hastle, been there done that.

As for Tax if you have both been living in you places up to now and plan to sell you have no tax issues since you have only ever had one place each up to the time one or both of you decide to move. you do need to consider this IF you plan to keep more than one place.


If you can get £120k for your place and £400pm rent thats only 4% gross a very poor return since this is likely to be nearer 3% after expences and two months voids take this down to 3.3% before other expences. because you borrow at what 6% you are LOOSING money if you rent this place out and during the down turn you accumulate a lot of losses that need to be made up again and is dependant on prices going up.

Sell up and buy back in when the numbers are better if you want to become a landlord and invest in property.

Would you buy this place with a mortgage as an investement now if you did not own it and had the money in the bank, I don't think so, so why keep it?

How you invest the money released is a seperate issue but renting your place out in the current market at this return is total madness.

If you want to reconsider BTL when the returns are better then setting up any mortgage on the place you live in as an offset as big as you can get will give you the buying power later, you would still want to mortgage a BTL place for tax relief but having good deposit or even enough to buy out right could put you into a great position if a desperate seller is around.

Long term property has been ok but why get into property investing near the top of a cyclic market when you can get in nearer the bottom which makes the returns even better.

jamesd

BANNERSMUM, for option 2 you don't have to deduct the cost of your partner's mortgage because I already did that by not including the payments in the calculation. You can see that in option 1, where I included those monthly payments in the amount being invested.

For option 3 you have the rental income and I've assumed that your rental income is at least enough to pay the mortgage interest. So I didn't use either rental income or morgage interest payments in the rest of the calculation.

getmore4less, have a look at the performance of the BlackRock UK Absolute Alpha fund. Grew by 12% last year, steadily, while the markets were bouncing around. This chart compares it to the UK FTSE All-Share Index. It's a nice place for a large chunk of money if a lump sum is around, or for more cautious investing.

For better market times, look at something like Invesco Perpetual Income. 9% wasn't cautious but it's below the results that medium risk investing can achieve.

You have illustrated why I used 9% investment growth and 6% property growth instead of the real 12% and 8% long term averages, though. Nice safety margin already built into the calculations.

Not that it actually matters much: the invest lump sum and keep property options beat the sell option so long as investment growth and property growth average more than the mortgage interest rate. That's not likely to be false over the long term.

getmore4less

For option 3 you have the rental income and I've assumed that your rental income is at least enough to pay the mortgage interest. So I didn't use either rental income or morgage interest payments in the rest of the calculation.

£119k loan at (lets be generous) 6% £7140
Rent £400pm(MAX) £4800.

This property if rented is loosing money from day one and totaly dependant on increase in value to make it work as an investment.

Long term is all well and good but not when you are loosing £2340 per year on cash flow in the first year and posssibly many more.

Anyone can with hindsight can point at good investments but don't forget the years of property doing nothing last time round(you do remember those?).

Having capital tied up in property is one thing but borrowing to invest and having to support the cash flow is a totaly different ball game which is what you are proposing in the short/medium term for this property.


Shares/funds require picking in advance and hoping that you picked the right ones.

Past performance should not be used as a guide to future performance.

Investing spare cash is a risk but borowing to invest is something that needs to be considered very carefully that why you should aim for BTL to be cash flow neutral or better AFTER costs.

lucyyy_2

i agree^^
im in a similar situation.

jamesd

getmore4less, you're using too high a loan as a cost to the BTL business for this comparison calculation. 80k of the 119k loan amount is the existing personal mortgage on his place with only 39k attributable to the business (except for tax purposes - where the whole 119k will be charged to the business to get the tax benefit of rental offset reducing taxable income).

His mortgage of 80,000 over ten years on repayment with 900 monthly payment would be at 6.29% if amount and term are exactly right. Interest only that 80,000 would be 419.33 at 6.29%. Adding 39k to the loan to cover the BTL portion increases that to 623.76 so 623.76 - 419.33 = 204.43 is the cost of the portion for the BTL property.

Add to that 204.43 the 81.25 a month that I calculated for the other 15k of the BTL property cost at 6.5% mortgage rate and we have a mortgage cost of 204.43 + 81.25 = 285.68 a month.

No problem for the anticipated 400 a month in rental income to cover 285.68 a month in mortgage cost and it could do so even at much higher rates that these. Insurance, maintenance, managing agent, no tenant and other costs also need to be allowed for, though, which is part of why I ignored the rest.

Before other costs than interest the BTL portion is cash flow positive by 1372 a year. It was only negative in your calculation because you made the business pay for the interest on his whole mortgage.

Assuming none of the 400 would be available to invest elsewhere, not allowing for any rental increase over ten years and ignoring the tax benefit of the offset of mortgage interest on the 80k against rent were also approximations I used that would actually make the BTL option more strongly better than it was in the comparison calculations.

Your point that it might be better to sell now and buy a different property later is fine. I do wonder whether the 120k could actually be obtained in the market today, though. It might be simply taking a capital loss that is avoidable by waiting. The costs of selling and buying also shouldn't be ignored and may make it not worth doing anyway. For comparison purposes the calculations still suggest that BTL is the better of the three options.

For the purpose that brought BANNERSMUM here it's clear that either BTL of her place or selling her place and investing are the options that are expected to be better than selling and paying off his mortgage. And that BTL and investing the remaining difference is over the long term the option that's likely to leave them best off.

For fairly cautious and readily available lump sum single investments in the current climate, BlackRock's UK Absolute Alpha fund is the one to beat, with 12%+ a year reasonably likely even with the market bouncing around. Not ideal for long term regular investing, though, because it won't do as well during good times.

getmore4less

Based on £120k and £400pm rent, say 6% loan thats £80k covered(less after expences)

The minimum personal investment into this BTL business is £40k on £120k value, any return on that £40k has to come from house prices going up and I think you are looking at 5years at least based on last time round.

Gains are diluted by the opportunity losses of not investing elsewhere but in this case the OP does not have £40k spare cash lying around to invest they have to borrow it. It does not matter how you wrap things up with it's not real business money it's a loan on a PPR. the money has to be accounted for as part of the buisness.

Ok there are the friction costs of selling an buying to factor in if the goal is to become a landlord now or later, but just because you have a property is not a good reason to become one now. A buy and sell at this value could be done for probably under £5k. My view is there will be better opportunities over the next year or two even after these costs.

I would not put £40k of my money into this buiness I would not see a return for a very long time.

getmore4less

Back to the original BTL is the way to go post I said I would lookat teh numbers, growth rates are quess work so no probelm with them
option 1 and 2 look ok (not checked the actual calculations) from the descriptions.

The numbers on option3 don't look right

jamesd wrote: »

Option three is to keep both places and do a full rental setup. That means increasing the mortgage on his place to 119,000 which is 85% of the value his place. That pays off 46,000 of the 55,000 mortgage on yours leaving 15,000 outstanding. With buy to let property the interest on 100% of the value of the BTL property at the time it became a letting property is deductible from income, regardless of which property the mortgage is on. So up to 120,000 is eligible, the full value of your place. Normal homeowner mortgages are cheaper than BTL mortgages so doing it with his mortgage probably beats changing yours to BTL to let it out. So now the interest rate on that 119k of mortgage is effectively zero and I'll assume 6.5% on the remaining 15,000 of mortgage. That's 975 a year or 81.25 a month.

For simplicity I'll assume interest only mortgages, also that's the best type to use for BTL because it keeps that interest tax benefit. That means deducting the 119k and 15k = 138k from the final answer I calculate next because that money has to be paid off to match the first two cases.

You now have 1400 a month less 81.25 a month to invest, 1318.75. That's worth 257,110 in ten years at 9%. You have to subtract the 15k mortgage left behind on your place and the 119k mortgage on his place. That leaves 123,100 gain. Now the two properties and their price increases. His is the same 250,700 from the other two but you still have yours in this case and that 6% property price value increase means it's worth 214,900. So this option has a value so far of 123,110 + 250,700 + 214,900 = 588,700.

I've ignored the rent probably being more than the 119k mortgage interest and maintenance and letting costs of yours, which it almost certainly will be particularly after a few years. That further increases the value of option 3.

Now, I'm about to go to sleep because I work nights so someone may catch a calculation mistake in this you can see the pattern.

What I recommend is that you spend a couple of hundred Pounds on an accountant familiar with BTL and ask the accountant to work out the relative values and costs of the various choices and work with you to get the PPR and other things right so whatever you choose to do you get things done efficiently for tax.

Increasing the PPR mortgage to £119 from £80k is £39k so that leaves £16k offset by £15k leaves £1k.

The Interest only payment on the £119k @ 6.5% is £645pm offset the rent of £400pm and that leaves £245pm going out on this mortgage + £5.41 for the other £1k.

using www.whatsthecost.co.uk
So £1400-£250 to invest thats £1150 over 10 years at 9% £222,572.73
(your 1318.75@9% came to £255,232.86 not £257,110 )

lets say around £33k less, leaving the rest of the calcs the same your £588,700 reduces to around £555,700.

against the option 2 of £544.290.

Now this is based on the full £400 being offset against the loan but in reality we are going to see 20% of this go in expenses so we need to take another £80pm out of the saving being invested, 10 years £207,089.41 so we are now around £48k short which is £540k.

So when you stick realistc numbers into the calculation option 3 is no longer the no brainer, and given that 6% average on property is unlikely for the next 10y highly risky.

But based on your numbers there is option 4 which is to mortgage both places PPR £120k(use up that odd £1k) @ 6.5% £650pm and a say 50%ish £60k loan on the BTL at 7%. £340pm so that is £990, income is £1400+£320 leaving £810 to invest with the £60k 10 years @9% gives a total of £288k less the £60k is £248 an uplift of another £40k.

jamesd

getmore4less,

jamesd wrote: »

Normal homeowner mortgages are cheaper than BTL mortgages so doing it with his mortgage probably beats changing yours to BTL to let it out. So now the interest rate on that 119k of mortgage is effectively zero

Thanks, you're right that I'd calculated as though the BTL rent would cover the whole of that mortgage even though 400 rent won't. Sorry I missed your point earlier.

As you did, I should have allowed for the rent being only 400 and reduced the investment amount by the difference between mortgage and rent. I'll redo the calculations later to see how close that leaves us - probably quite close.