Keep current home as an investment when trading up?

[Sarenco]

Hi Gordon

A few thoughts:-

1. The 30% figure is a long-term average figure;
2. As a property ages the cost and frequency of repairs inevitably increases;
3. There are a lot of costs associated with managing and maintaining a rental property over and above the cost of repairs (not all of which are tax deductible) - I've listed most of the main ones above;
4. It is important to account for your own time in assessing the costs associated with managing a rental (assuming you don't work for free!); and
5. It only takes one tenant to stop paying rent and/or seriously damage a property - it happens.

 

[nest egg]

An update on proceedings:

Combined net income up (moderately) to 7,700 (excl bonus). However additionally I've been fortunate enough to come into a windfall of 35k which has pushed up available cash.

Current house value: 455k / Mortgage: 272k
Current cash/Investments: 140k

Plan is as before, move to a new house, let out current property.
New house value: 600k
New mortgage: 480k

I'm giving strong consideration to doing this, and reviewing the situation in 12 months' time. Believe me, I have reservations about the amount of hassle I may be taking on, but I have to balance this with the potential reward, and that the new mortgage should be within the realms of affordability.

 

[Brendan Burgess]

reviewing the situation in 12 months' time. Believe me, I have reservations about the amount of hassle I may be taking on, but I have to balance this with the potential reward,

That really is the important issue.

You are not making a decision with which you are stuck for the next 20 years.

You should review it from time to time. After a year being a Landlord, you might decide that you really enjoy it. Or you might decide that you have had enough.

The only issue is that the house is probably in better condition and more saleable today that it would be after a tenant has been in it for a few years.

Brendan

 

[Sarenco]

I'm giving strong consideration to doing this, and reviewing the situation in 12 months' time. Believe me, I have reservations about the amount of hassle I may be taking on, but I have to balance this with the potential reward, and that the new mortgage should be within the realms of affordability.

I still think you are taking on an awful lot of risk for a very speculative return.

However, you are obviously going into this endeavour with your eyes wide open so I hope it works out for you.

 

[ixus]

If it was me, and I had I felt the need to own a second property, I would. Realise my CGT free returns on home, if any.

455 - 272=183k

Buy house at 600/400 mortgage.

183+140=323k-200 deposit =123k left

Use 80k to buy a 2 bed apt for 200k with 15yr mortgage (so 60/40).

Leverage and term of loan (so interest )brought well down plus 43k cash on hand.

 

[SqueezedMiddle]

Have you thought about the act now think about the consequences later policy of our government towards property investment.
In my view this is very likely to effect your sale value on a year or two.
I believe the next surprise coming down the line will even be to prevent investors selling their properties.

 

[Firefly]

Have a house which we like, but which is ultimately too small for our needs.

Hi mojoask,

Just a suggestion....would you consider getting the advise of a few architects? The reason for asking is that you clearly like the area you are living in if you are thinking of buying a bigger house close by. 100-150k might totally transform your house. You nearly have all the funds you need to do this. You could then easily make generous payments into a pension fund and build up your savings again.

Firefly.

 

[nest egg]

Thanks all for the feedback, really do value it. Look we haven't walked into anything just yet, but also haven't dismissed the idea entirely either.

There are few themes you've raised in the thread, let me try to explain our thinking:

On extending. This was our starting postion to be honest, and we could fund it from cash, that's a real bonus. But we've had two architects come and take a look. There's a limited amount of space for us to extend, and as a result they both gave effectively the same advice. Having considered the option, we feel ulitmately we won't be satisfied with the amount of space we have with the end result. For that reason we've ruled it out.

On being a landlord. It may not be for us, we have a family, and we have our careers, and these are more important.
Mitigating circumstances: 1) our current house is a "known quantity" 2) it's 3 years old which should mean lower maintenance in the first 7-10 years of its life, 3) we're considering renting it unfurnished, and will be living in the same area, thus reducing some of the time needed to maintain & monitor the investment

On the finances. Certainly it's something which sits uneasily with me, I can't deny that.
Mitigating circumstances: well it's not possible to mitigate this risk straight away, that's the reality, we are putting most of our eggs in one basket. The only mitigating circumstances are that we *should* have 20-30 years left in us to work, which gives us the opportunity to diversify into other investments over that time before we retire, and that we can sell the house within a year and keep the gain CGT free.

 

[Firefly]

On extending. This was our starting postion to be honest, and we could fund it from cash, that's a real bonus. But we've had two architects come and take a look. There's a limited amount of space for us to extend, and as a result they both gave effectively the same advice. Having considered the option, we feel ulitmately we won't be satisfied with the amount of space we have with the end result. For that reason we've ruled it out.

Good to rule that one out.

I've toyed with buying something myself pretty recently and hassle factor (just one bad tenant) and constant interference in the market by the government has put me off to be honest...the return would want to be pretty significant.

 

[Sarenco]

our current house is a "known quantity"

Have you considered the possibility that you might be suffering from what behavioural psychologists call the "endowment effect"?

Look at it this way - if you didn't own your current home, would you buy it as a rental at its current price and at the current financing terms?

 

[nest egg]

Have you considered the possibility that you might be suffering from what behavioural psychologists call the "endowment effect"?

Look at it this way - if you didn't own your current home, would you buy it as a rental at its current price and at the current financing terms?

Whether we're suffering from an emotional bias is by definition not an answer we can give impartially
From our perspective, all of this may be premature, let's not rush and make the decision right now, we can continue to weigh up the pros and cons during the mortgage application, and the result may just answer the question for us.

 

[Sarenco]

Whether we're suffering from an emotional bias is by definition not an answer we can give impartially

Touché!

I think you get my point though - if you didn't own your home would you buy it today as a rental? It's really just another way of framing the same question.

 

[nest egg]

Often you don't hear how these things worked out so thought I'd provide an update...

We thought long and hard about it, but ultimately decided the cons of being a landlord outweighed the pros. What did we do instead? We opted to buy a larger/better house that meets our immediate and future needs. We got a little more for our old house than initially estimated, and we liquidated some assets. Net result is that we have a mortgage of 450k over 30 years, on a house valued at 730k. Whether this is the best decision to build wealth, we do not know, but we are happy with the decision and delighted with our new place.

 

[Brendan Burgess]

Hi mojask

Thanks for the update. You are right, a lot of people don't tell us their final decision and how it turned out.

Net result is that we have a mortgage of 450k over 30 years, on a house valued at 730k.

This gives you an LTV of 62%. Did you consider realising a few more assets to bring the LTV below 60% which is where the best deals usually are?

I presume you were not moving a tracker?

Which lender did you go for and what deal did you get?

Keep all your paperwork as it's quite likely that you would benefit from switching to another lender in the next few months.

Brendan

 

[nest egg]

Hi mojask

Thanks for the update. You are right, a lot of people don't tell us their final decision and how it turned out.



This gives you an LTV of 62%. Did you consider realising a few more assets to bring the LTV below 60% which is where the best deals usually are?

I presume you were not moving a tracker?

Which lender did you go for and what deal did you get?

Keep all your paperwork as it's quite likely that you would benefit from switching to another lender in the next few months.

Brendan

Yes we did, but as we're with BOI fixed for a year, the rate wouldn't have changed had we gone <60%. Will look at the market in 12 months' time and see what BOI can do, or what others can offer.

 

[Brendan Burgess]

Hi mojoask

No need to wait for a year.

It is unlikely that there will be any break fee if you break out early.

So if there is a better deal elsewhere, then go for it - obviously checking the break fee first.

As a matter of interest, did BoI give you 2% cash back on the mortgage?

Brendan

 

[nest egg]

Yes, was an influencing factor in going with them. Would have thought the breakage costs would be prohibitive?

 

[Brendan Burgess]

Would have thought the breakage costs would be prohibitive?

It may be much cheaper than you think to break out of a fixed rate early...

 

[nest egg]

Interesting, seems crazy at one level that banks operate cashback offers when breakage costs have been curtailed.

 

[Firefly]

Often you don't hear how these things worked out so thought I'd provide an update...

We thought long and hard about it, but ultimately decided the cons of being a landlord outweighed the pros. What did we do instead? We opted to buy a larger/better house that meets our immediate and future needs. We got a little more for our old house than initially estimated, and we liquidated some assets. Net result is that we have a mortgage of 450k over 30 years, on a house valued at 730k. Whether this is the best decision to build wealth, we do not know, but we are happy with the decision and delighted with our new place.

Good stuff. Being happy is more important than building wealth IMO. Enjoy the house now!!