We’re in a fortunate position where we are able to purchase a second home with the plan to move into it and then let out the first (3 bed detached in Inverness). Seems like a good idea in principle with the rental income paying off the remainder of mortgage 1 (rather than buy to let interest only) resulting in an asset that we don’t owe anything on which will continue to bring in an income.

However – letting seems to be a minefield at the moment with the recent budget changes but it appears to be mainly the buy to let market – i.e. interest only mortgages. There is a small mortgage left on property 1 (Circa 18% of property value) which would be covered by the letting income until its paid off – circa 4 years. We would essentially continue in a similar financial position of income/outgoings as we are at the moment paying off mortgage 2 on the new property with mortgage 1 being covered by letting income, then contributing to mortgage 2 (+ property 1 maintenance).

I’m aware of letting horror stories, “unforeseen” costs, expensive letting agents, problem tenants, etc. so trying to grasp if letting is really worthwhile. We’d hope with the sort of property we would be letting out would draw a longer term more secure “family” orientated tennant. We appreciate you don’t get as high a return as if it was a 1/2 bed flat/property but that could result in increased tennant turnover and problems tennants.

We also wouldn’t have the legal fees etc. for purchasing a new property since we already “own” it, we would just have to get permission to let from the mortgage company which I understand shouldn’t be too difficult.

Other option would be to sell property 1 and invest in some smaller properties to rent out, however that would incur selling and buying fees…

Final option would be to sell property 1 and pump the money from property 1 into property 2 and have a small mortgage on property 2. However at mid 30’s with a young child, it seems like a wasted opportunity of investment given our working careers ahead…

Any thoughts/considerations?

We also wouldn’t have the legal fees etc. for purchasing a new property since we already “own” it, we would just have to get permission to let from the mortgage company which I understand shouldn’t be too difficult

Remember that means you’ll be switched to a BTL mortgage so interest rates will be a lot higher than a standard variable rate mortgage. Around 4.5% ish.

Your just as likely to get bad tenants in your three bedroom house as a flat.

Family with teenage scrotes for example.

Is it really worth the potential hassle?

Just sell it to someone looking to make a home not a profit.

Just to confirm, your LTV on the rental property is about 18%?

A (very) quick search suggests you can get a 2 year fixed BTL at under 2%.

Sounds like a no-brainer to me – as long as rental income = mortgage + 10%.

Unsurprisingly, it depends

We were in a similar position to you some years ago. Currently we have superb tenants and the mortgage on the rental property is paid off. Whilst there are no guarantees of what the future will hold, at the moment we have an asset and a stable income. The asset has appreciated since we bought it and unless the financial sh!t really hits the fan, will net us a return when we realise that asset. We don’t plan on doing that for many, many years.

With this in mind I’d say do it…

…BUT…

…we’ve had nightmare tenants, we’ve had the house lie empty and we’ve had to give up a lot of our time to maintain and manage the property, which is always a challenge for us as parents with full time jobs.

Practicalities aside, I’m delighted that the current tenants have made a genuinely lovely home that they could not have afforded to buy.

{EDIT}

Just sell or rent it to someone looking to make a home not a profit.

FTFY

Don’t make the mistake of doing your calcs based on mortgage cost versus income. Calculate your potential yield based on total value of the house and allow for the price of cleaning, maintenance and empty months. To do it any other way you might think you’re making a profit but you could have been doing better with all the cash in an investment without any of the associated work and worry.

As above use the income to cover the mortgage and the running costs, the real money is made when you sell it when the market price is high.

I’m a gardener and do a lot of work for letting agencies due to the state some of the gardens get left in and if they can’t get the money off the tenants then the owner has to pay, I get jobs which can be as little as £50 right through to nearly £1000 to fix a garden up, imagine what the inside of the houses can be like. A friend got stung for 10k on property that needed work after being let.

The budget changes aren’t specific to interest-only mortgages, but do depend on how much interest you’re paying. Currently, you can claim mortgage interest as an expense. Under the new rules, you can effectively only get basic rate tax relief on the interest, but due to the convoluted way in which it’s implemented, it effectively lowers the higher rate tax threshold by the amount of interest in question.

If you’ve got a small repayment mortgage, with not too long left to run, you’ll probably not be paying much interest, and obviously the impact depends on your tax band.

When you sell the property, you’ll be liable for capital gains tax on any amount by which the property has increased in value from the point that you stop living in it.

Sounds like you’re close to be mortgage free in your 30s, that would be a great opportunity in itself, if you could be reasonably financially secure otherwise.

Minimize the risk by only taking tenants who qualify for Rent Guarantee insurance. The name is slightly misleading, you’re basically paying for a third party to evict bad tenants whilst also covering your missing rent. Kicking out bad tenants can take months and cost thousands of pounds in legal fees so protect yourself against the risk. You’d be mental not to imo. And it’s tax deductible..

When you sell the property, you’ll be liable for capital gains tax on any amount by which the property has increased in value from the point that you stop living in it.

minus the first 18 months IIRC. But long term that is not significant.

I would not have a problem letting it out. If you are that close to fully owning it then go for it. You could find and vet the tenants yourself (use a referencing agency obviously) but for your first time I would suggest finding a decent agent. If you are close by don’t worry about a full managed service and in all honesty it can be a lot better to do that stuff yourself. Treat agents as though you would tenants and make sure they are doing their bit. My experience is with a flat in Bristol in a decent area and bringing in a high rental out of “scrote budget” and you may not be in that situation so there is an element of risk. Mum has had terrible tenants and terrible agents. Dad has also had a terrible agent and PITA tenants (not in a high demand area and only tenant wanted unfurnished so he gave away a lot of decent furniture only for them to move out 6 months later).

Tenants on benefits need not be bad and you can get good regular income and likewise “professionals” might be a nightmare but that is why you need to make sure they are checked out properly and if anything in the slightest is not right then say no. Make sure inspections are carried out and thorough with photographs if it’s an agent doing it. Also take a thorough inventory with photos.

Some interesting pointers about tennants and the Rent Guarantee insurance. I guess the tennant essentialy either makes or breaks it as long as the rental/mortgage numbers add up. We would only be a a mile away so fairly handy for inspections/maintenance etc. and keeping an eye on things.

I believe a letting agent would certainly be an advantage in the first instance to keep us on track with the legal requirements etc but assuming you get a good tennant then we’d be paying for not a lot (until the poop hit the fan!)

Regarding Capital gains tax is the base line the value of the house at the point that it becomes your second home or the value of the house after 18 months after it becomes your second home that it starts applying?

I think you calculate the value from when it becomes your second home to when you sell it and then allow for 18 months pro rata and for any other allowable deductions – maintenance, legals fees etc etc. Some improvements are not allowable deductions.

Gary_M – Member

We also wouldn’t have the legal fees etc. for purchasing a new property since we already “own” it, we would just have to get permission to let from the mortgage company which I understand shouldn’t be too difficult

Remember that means you’ll be switched to a BTL mortgage so interest rates will be a lot higher than a standard variable rate mortgage. Around 4.5% ish.

Not necessarily, mortgage companies will often keep your mortgage the same as they probably know you could go and get a new mortgage with another lender if their BTL offer isn’t acceptable. My rental mortgage is exactly the same mortgage I started with when I lived in my flat.

They don’t always make you switch to BTL. I relocated – the mortgage company gave me two years, then slapped a surcharge on top of the existing mortgage.

I’d recommend not using an agent if possible. They are interested in letting the property to get their commission, not necessarily in choosing the right tenants. Do it yourself – follow up on references, do a credit check, Google them.
Renting Out Your Property For Dummies book is a good source of info including sample contracts.
I’m 4 years into letting out my old house and it has been a very positive experience.

Just sell it to someone looking to make a home not a profit.

This.

We have a major housing crisis created by a shortage of property to sell and a massive % of the Great British Public go “I know what I’ll do, I’ll buy another house/keep mine when I move” – great response! That solves the problem, doesn’t it…

Worth remembering that this belief that housing is some kind of magical money printing machine is holding back real economic growth. Lots of money which would otherwise be lent by the banks to businesses, or invested in something useful, or spent by homeowners and tenants on real goods and services, is being diverted into a bunch of buildings which already exist – adding no economic value whatsoever. So if you want to spiral down into deflation and secular stagnation (lower living standards and wages) then go ahead.

Less politically – think very carefully about the most likely outcome long term for UK housing given we’re at historial peak and way above the mean of affordability based on wages. Think also about the Tories electoral gain from going after BTL and the whole rental sector. They got the last election from boosting house prices but as an increasingly large proportion of the electorate cannot afford to own, Osbourne will now be putting policies in place to appeal to the renters, not the owners/landlords. The last Budget was just the beginning to see what reaction he got from the electorate. He also has to find more taxes from somewhere and landlords are an easy target – the general population have no sympathy for them.
BoE has serious concerns about BTL and UK economic instability, so expect action to be taken there. Interest rates will go up at some point in the next few years.
Prime London is already falling in price.
The Economist explains the problems well Calling for a house price crash worth reading the comments there and seeing who thinks the current situation is a good and sustainable thing…

I fail to see how having my old house lived-in by three young professionals at a very reasonable rent is somehow contributing to a housing crisis. My old neighbours recently sold theirs and it’s now lived in by a single person instead of a family of four. Which is the better outcome?
I’m a long way from London by the way – the picture is very different across the country.

Kicking out bad tenants can take months and cost thousands of pounds in legal fees so protect yourself against the risk.

Cost us about £7k a few years back and took about 9 months all in…

Don’t lumber yourself with a lot of hassle, work and potential for problems.

Get rid of any debt you have, keep some money for a rainy day, keep some as a pension and buy yourself a new bike.

Renting out property is not a hobby, its a business. So think very carefully.

I used to do it, but sold it and now have a much better time. No worries, all fun.

We have a major housing crisis created by a shortage of property to sell and a massive % of the Great British Public go “I know what I’ll do, I’ll buy another house/keep mine when I move” – great response! That solves the problem, doesn’t it…

The housing crisis is ‘not enough place to live’, not ‘not enough places to buy’. Leaving a second property dormant (i.e. holiday home) is the issue for housing in small towns villages.

Rent it out, let it pay your mortgage and be left with an asset that you can pass on to your kids.

No, don’t leave it for your kids, spend the money now and enjoy life. You never know how long you have got, so live it to the full.

I suppose it depends on how comfortable the Op is?