Sell Rental Property?

[appd]

Hi

I bought my first home in 2006, which has been rented out now for a few years.
It cost 328,000. Mortgage was 265,00. Balance now is approx 220,000.

I estimate the house could sell for between 160-180K.

The repayments are 870 pm, rent is 900. I could get more due to shortage or rental properties in the area but tenant is reliable.

Between tax, constant repairs(showers, waching machines, boilers etc), insurance, it seems to be costing me about 4000 per year.

Am I pouring money down the drain? Financially does it make more sense to sell the house settle the balance and walk away. Rather than bleed money every year for the next 28 years?

thanks for any comments

 

[Gerard123]

You have set out a dilemma facing a lot of people renting in the current environment. How long should one continue to fund a rental property or is it better to discontinue and call a halt by selling?

While I am sure you would prefer not to be subsidising as much as you are the alternative is sell say at 170 and then realise a loss of 50. This is the equivalent of twelve and a half years paying at 4 a year. Are house prices going to increase in the next twelve years? Without predicting its fair to say we are in the lower end of the cycle at the moment.

How will you pay the 50 grand today, cash or loan? If a loan will the rate be higher, over what period, annual cost, etc to be considered. If cash is it the best use?

Also is the 4 grand cost every year or was that the last year you got hit badly? What has been the average cost per year say for the past five years? Use actual numbers from your tax returns. A 4 grand annual cost is a huge cost in relative terms and equates to four and a half months rent. Seems high to me though you have the actual figures.

Regarding the rent. Realise you have a good tenant and it is well worth holding onto though not if they are paying you significantly below market. There were plenty of good tenants who were not shy at letting landlords know that rents were going down in the market some years ago and they would leave if they didn't reduce the rent. So while being appreciative of good tenants its a business and make the decision that's right for you. A small discount for good tenants is warranted as long as you are not giving away too much.

There are plenty of other good tenants out there, the thing is do our homework when selecting a tenant, always check references and get someone else to accompany you to meet them for a second opinion. An extra hundred a month amounts to a quarter of our annual funding cost remember.

Another thought. If it is costing you 4 grand for new things etc are the tenants really that good after all? Are they properly minding stuff? Washing machines last for years if properly minded. So do showers.

The other thing that's important is your own personal circumstances. What age, employment, what are your pension arrangements, what other investments do you have, etc. Lots of things to think through.

Not an easy decision. For what it's worth based on what you set out my gut says if you managed to survive thus far and can fund the 4 grand don't panic now and stay with it. However you should seek to manage this better by seeking to increase rent, manage costs, or both. Though if I knew more about your own situation and arrangements my view could change.

Good luck!

 

[appd]

Thanks for your well reasoned thoughts. Much appreciated.

4,000 per year seems high to me, which you have confirmed. However, tax every year is about 2000, then insurance, boiler services, and there is always something to be fixed / replaced.

I would be spending cash to pay off the loan, but with interest rates so low, and DIRT so high, I thought it worth considering using it to repay the mortgage.

There is no immediate requirement to make a decision, so I will take your advice and not panic for the moment.

thanks

 

[facetious]

I am a novice when it comes to things like this, but, I would also put into your equation that in the future (only God knows when) property prices wiil rise. So, in 5 years time, the house may be worth 5% maybe 10% more. At 10%, that is 25k.

If you know how to do a spreadsheet, that would be a very useful way of seeing what might happen with different scenarios.

Perhaps, if someone could PM me various details I could do a spreadsheet available to any AAM posters.

 

[ronaldo]

If rent is 10,800 and tax every year is 2,000, are you claiming all your allowable expenses?

You must be on a good mortgage rate because, allowing for a 5% BTL rate (they're generally higher), you'd have interest of about 11,000 per year, of which 75% is an allowable expense. When you add insurance, repairs and wear and tear to this, you'd unlikely be paying any tax.

If you are on a really good rate, selling up and paying interest on the shortfall could see you actually paying more interest than you are at the moment.

I think the below-market rent is the thing that needs the most serious consideration. A good tenant is a great thing to have but, sometimes, a landlord will use this to justify their below-market rent when, in reality, the majority of tenants are good tenants.

 

[facetious]

If rent is 10,800 and tax every year is 2,000, are you claiming all your allowable expenses?

You must be on a good mortgage rate because, allowing for a 5% BTL rate (they're generally higher), you'd have interest of about 11,000 per year, of which 75% is an allowable expense. When you add insurance, repairs and wear and tear to this, you'd unlikely be paying any tax.

If you are on a really good rate, selling up and paying interest on the shortfall could see you actually paying more interest than you are at the moment.

I think the below-market rent is the thing that needs the most serious consideration. A good tenant is a great thing to have but, sometimes, a landlord will use this to justify their below-market rent when, in reality, the majority of tenants are good tenants.[/QUOTE]

Which also brings into question as to how landlords calculate deposits.

There seems to be a pretty well blanket policy of one month's rent as deposit. Landlord's should consider one month's rent as the minimum deposit and is increased depending on the tenant and their possible attitude to renting.

Certain elements can cause extra wear and tear (and also more damage), other elements are more likely to have rents arrears. Again some elements are more likely to be anti-social while others are just not "house savvy" and will can the landlord when a light bulb blows.

A tenant should act as though they are a property owner and look after the property with the respect a house owner would have. There are some elements that think "well, it's not mine, not to worry".

Thus, I would suggest that landlords calculate the amount of the deposit on the facts that they can best discern from referencing checks and interview with a prospective tenant.

On the other hand, most of the problems seem to be with the lower end of the property market, where the accommodation standards could be questionable. Redecorating a property is often papering over any problems and will be discovered in several months, if not days or weeks, of a tenant moving in. Old appliances give trouble, old furniture can be uncomfortable etc. Then the irresponsible landlord claims it's a new problem and tries to evade his responsibilities and obligations as well as dragging his feet in correcting the issues.

A new tenant is not able to check every piece of furniture, every appliance, every bathroom piece of equipment (showers, toilets, taps etc) at a viewing and if the property "looks" reasonable, and appears to be in compliance with the law, they will "go for it".

Again, location will often determine the type of tenant that is likely to try to rent a property. And locations that are less desirable are likely to attract the poorer tenant as they cannot afford somewhere better. And the less desirable locations, with the lower rent will probably have the accommodation that is on the borderline (or even below standards).

Thus a non flat rate deposit of one month's rent would seem a reasonable choice for the responsible landlords who do look after their tenants in accommodation that is properly equipped with durable furniture, fixtures and fittings

 

[Luternau]

Mortgage was 265,00. Balance now is approx 220,000.....


...The repayments are 870 pm, rent is 900. I could get more due to shortage or rental properties in the area but tenant is reliable......

....Between tax, constant repairs(showers, waching machines, boilers etc), insurance, it seems to be costing me about 4000 per year.

It is a common misconception that when rent does not cover mortgage repayments in full that people say they are subsidising the investment. However, capital repayments go straight to the bottom lime in paying back the investment-so are not wasted.

Property prices wiill recover somewhat, who knows when or by how much (speculation on house prices is not allowed). If you are repaying capital on this property, the difference between its value and outstanding mortgage should be moving towards each other-making, in my opinion, a hold strategy the best option for now.