UK Landlord Forum / Life

Hi,

I recently bought a flat in London zone 4.

I am not happy to live here and by next year I have the possibility to rent it out so that I can go and rent myself a bit more central.

It looks like a feasible option financially, but I would like to have some expert opinion.
All I want is not to loose money with the letting, I'd just like the mortgage pay for itself.
There are so many unpredictable variables that it is really difficult to forecast, especially in terms of taxes.

Firstly, letting my first and only home meanwhile I rent myself has any tax relief? or is it considered just as any other rental income?

I am self-employed and my monthly expenses for the flat are:
£731 mortgage repayment
£20 ground rent
£110 service charge

Agent fees will probably be around 10%.
Then obviously there are all sort of extra fee for surveys and stuff depending on how much often people moves.


So the question is, How much do you think I should rent the place not to loose money with it?

they told me I can probably rent around £1200-1300, will this be enough to give me good night sleep?


as I said I know is impossible to get a real answer, but I just want an opinion from experts and see if the figures look promising or completely discouraging.


Thanks for you attention.

Sergio

for example if I rent for £1250

Agent fee = £125
Taxes = £(1250-125-20-110) * 0.2 = £199

profit = £1250 - £(125 + £20 + £110 + £199 + £731) = £65

So I could make £780 per year, which hardly pays for all the extra fees? not to speak about what I spent for the furniture...

But at least it should allow me not to loose money at least?

than is pretty grim when the interest rate will go up after my 2 years of fixed rate... but then I can hopefully sell and maybe buy outside London.

Why employ an Agent?

Too risky and time consuming.

If I think of all the added stress and time taken from work in the end might end up being even more expensive.

I think I should consider the agent in my expenses.

You will pay VAT on the agents fees too!

Please be careful of advice received from websites (including my own) and always do your own research.
Obviously I cannot understand your full situation from a small blog....

Sergio
Am always puzzled as to why new landlords are so focused on tax...there are 101 other things to consider first but anyway....Not sure I follow the calc to get to 780p.a. income..

Do it on an annual basis (so the tax calc makes sense)

...£15600 income (at 1300 per month)
Deduct agent fee say 10% (upper end incl fees for contract etc) 1560
Insurance - 250
Gas cert -50
Mortgage interest - 8772 (732 x 12)
Boiler cover (?) 200
Gnd rent 240
Svc chg 1320

Isn't that more like 3208 p.a.
Tax = 3208 x 20%
Means A.T. earnings £2566

What did I miss?
Your tax calc in the second post is totally wrong and indicates you don't know how all this works (I doubt you have had the foresight to include a future amendment to the tax law denying any mortgage cost deductions esepcially as you want to sell in two years - so your calc is wrong) ...therefore first advice is TREAD CAREFULLY ....you not only need to learn about Landlordship (is that a word?) but also about financing and that I'm afraid is akin to a recipe for a cod liver oil egg flan (i.e. not good).

You almost certainly start at maximum at £2566 potential profit.
Sounds great?
Now look at what could happen ....
Interest goes up so take of 1750
Tenant doesn't pay and you to evict - take off 3 months rent 3900
Court costs (assuming you do it all yourself - 300
You have redecorate £1500 (and that is a super low estimate)
Replace one white good (incl installation) take off  600

Water leak damage 500
Tenant breaks something 500

So now how are we doing...? Oh yes total profit ..... Naff all...

But most importantly.....I cannot stress this enough (pun intended)....is the hassle and stress you will have to go through something you can deal with?
I could write a book on the stupidity of tenants and the hassle they can cause a Landlord ...

You seem to think that getting an agent in is going to mitigate the "Too risky and time consuming." effort of being a landlord...or somehow will reduce the "added stress and time taken from work" or (the best part) reduce your costs as it would be "even more expensive" if you do it yourself.

In my experience there is no agent that will achieve any of the above for you...
If you have some rosy eyed view that you sit there and count the cash whilst the agent runs around and takes out all the hassle at a low cost then seriously you need to take the ice bucket challenge and WAKE UP.

To answer the question you raised... the fact you have lived in the property will make no impact on income tax.
Eventually when you sell the property it will make a difference in the capital gains tax calc but I fear that is beyond your capability at this stage so don't worry about it yet.

Hope all works out for you but do open your eyes to the downside.

Best of luck

thanks a lot THEANGRYLANDLORD for the precious insights, is a good starting point for me to get to understand more.


Yes my calculation looked wrong because I was being pessimistic and not including the interest/mortgage deduction that is currently possible but with the new budget should disappear?
So by next year everything should get much more expensive tax wise and get closer to my estimate? am I wrong? You probably saying it will take atleast two years to come into function?

But very useful for me to understand that taxes is really not the biggest problem at the moment. I wonder if I can also deduct the furniture expenses?

Anyway, being the property a newBuilt I'd like to think that not many of your points will be of an issue, and I am hopeful that not getting paid is a remote issue, credit checks and corporate rentals are the source of my optimism.


But I see your points.. and they are a big source of fear for me to become a landlord...
On the other side is that I do not want to live here because few events made me dislike the area and also cut down my hopes in the area regeneration and jeopardize a little what the price increase could be.

I do not think that is possible for me to sell and purchase something else.. because i risk to indebt myself even more and get same sort of problems.

So if not rental the only other option is for me  to sell (now that I can make a profit) and go back to only renting for myself..
I am not sure if the havoc of being a landlord and possible financial losses are worth the fact that I am investing in a London property that sort of hedge the rent I will pay which otherwise would be completely wasted.


Anyway I am probably going a little off-topic...

Thanks a lot again for your time and the rich answer


Sergio

Sergio you say
Yes my calculation looked wrong because I was being pessimistic and not including the interest/mortgage deduction that is currently possible but with the new budget should disappear?
So by next year everything should get much more expensive tax wise and get closer to my estimate? am I wrong? You probably saying it will take atleast two years to come into function?

That's not right...the current change will still allow you deduct mortgage payments but the deduction only applies up to 20% tax rate so I'm afraid your calc is still wrong.  If you are not a higher band tax payer the new changes don't impact you.
What I was alluding to was likely some time in the future say 5 years from now there is a chance the tax law will change again and you won't even be able to claim at 20% but you couldn't have thought that far ahead.


I do not think that is possible for me to sell and purchase something else.. because i risk to indebt myself even more and get same sort of problems.

Not sure I understand the above statement

So if not rental the only other option is for me  to sell (now that I can make a profit) and go back to only renting for myself..
I am not sure if the havoc of being a landlord and possible financial losses are worth the fact that I am investing in a London property that sort of hedge the rent I will pay which otherwise would be completely wasted.

I am sure I don't understand that statement

Anyway hope my answers have helped

Best of luck

QuoteThat's not right...the current change will still allow you deduct mortgage payments but the deduction only applies up to 20% tax rate so I'm afraid your calc is still wrong.  If you are not a higher band tax payer the new changes don't impact you.

this is a good news at-least,
thanks for the clarification.

QuoteI am sure I don't understand that statement

I will try to better explain:

I bought in a modern block off-plan, build with high standards inside.
I rented in the area for the past 2 years with no problems a part from the fact that is zone 4 and a bit dull.
I bought 5 minuts walk away from where I used to rent, closer to an old council estate due to demolition/regeneration in the next 5 years.
Just one minute walk across my street there is a big modern development that sells 90k higher than what I bought for (they have gym, restaurants etc).

I moved in the new place in July. Since then we had some episodes of antisocial behavior from local young boys. They also entered in the communal areas tailgating oblivious residents. They slightly burnt some walls with a lighter too. They sometime gather in the square adjacent to my building where a sainsburys is.
This episodes and few personal reasons have put me off and I decided that I will be having a happier life if I can leave the area.

I have 3 options:
A. sell my flat with a profit and buy somewhere else.
B. sell my flat with a profit and go back renting in an area I love.
C. let my flat and go to rent in an area I love.

I think I can rule out option A as prices in London are gone crazy and I risk to be buying in similar conditions but having bought something much more expensive.
With low supply I do not think is possible to buy any quality in London at the moment.

Option B would free me from the weight of responsibilities, but I would have to go back only renting and feeling that I am throwing in the bin £12000+ per year.

Option C would allow me to throw in the bin only £4000 a year (or less if rental is successful). This is because my tenants will be paying my £8000pa mortgage.


Now the question is if all the problems and efforts coming from letting my own flat are worth the advantages of option C?


The massive regeneration plan in my area should make things better and prices higher, but always difficult to predict if is going to be successful. The building for now seems to be quite popular and agencies always ask if we want to sell or rent.
I fear a little over-supply for the future, but in London seems like demand will never die.
I will anyway have planned to sell in two years or so.. this should not give me problems with capital gain taxes.

I would let with an agent who I rented from for the past two years.
He showed to deal with every situation never requiring the landlord to deal with myself.
Hopefully a new build will not have that many problems anyway.
The agent has also in place a quite severe credit check I had to do myself back then.

Could I ask you if your experiences come from renting in London or other regions?
Do you have new built in your portfolio? if yes they have been any better to manage?


Anyway I would really appreciate your opinion once again.
As you warned me in the beginning I would not consider you as an oracle but I will anyway value your saying.


Thanks

Sergio

Hi Sergio
I wish I were an oracle but sadly not as the rest of this post will show.

Firstly, I like the the way you are thinking and the options you have developed shows logical reasoning and rationale.  However, I doubt that you will find the answer to your problem from a post (by someone you don't know and who doesn't know the property or even which area your flat is in) but I can offer the following thoughts...

Firstly, I would agree option A is out.  Mainly for the fact that you want to live somehwhere that you 'love' and you don't feel that you can afford to buy in such an area.  This is a philosophical reasoning.... that life is too short to be permanently miserable and I doubt any answer you get to live in an area that you do not 'love' will not be acceptable to you.

So that leaves option B and C (agree).
But am not sure evaluation between B and C is strictly an economic one....
Based on your numbers in the first post; the numbers do work out and you should in theory be able to cover your outgoings and make a small profit so no issue to rent it out, and so both B and C are viable options.

However ...I dont know how much deposit you have put down or the profit you will receive from selling... But lets call that £ XX,XXX. 

So option B is:
"Lose" £12,000 by renting AND Capital gain on a property by being out of the market AND profit from renting flat
"Gain" interest on £XX,XXX in an ISA AND financial flexibility AND removal a lot of hassle

So option C is:
"Lose" £12,000 by renting AND incur hassle of Landlordship
"Gain" capital growth on property AND small profit from renting flat LESS opportunity cost of investing elsewhere (ISA)

(BTW: renting is not losing, you can't rent out your place if you dont rent somewhere else, but as both options involve renting we can net that out of the equation)

So thats the long and short of it .......the question you ask is the hassle worth it?
Well you can see from the above two 'equations' the issue of renting another place falls out...and what you are asking can bolied down to .....

Do I want the hassle of being a Landlord to gain....(a) capital growth on property AND (b) small profit from renting flat LESS (c) the opportunity cost of investing elsewhere (ISA)??

Well I'm afraid all I can say is welcome to the club...that is basically the premise/decision for all Landlords.

Only YOU can determine if that is worth it to YOU.

Other thoughts....
Plus side is that your property is in London. You seem confident on re-generation..which hopefully will avoid the anti social behaivour of the locals.  I don't share view of oversupply (particularly in London and SE - immigration, family break ups and lack of new housing will ensure that for a good while) ...for 18 years I have bet on the long term rise of property values in London and the SE (houses not flats, I bought a new build to live in and then rented, but no different outcome on that...I have always been wary of flats) but I am not renting for property value gain (see my concern later in your plan...)...

New Builds usually have a warranty period (longer than 2 years) usually the NHBC guarantee but thats usually not so useful.  Check what you have with the developer, am not sure why new builds would be harder to rent out other than there are likely other rentals in your block that look exactly the same but your post indicates this is not an issue, demand is there.

I would caution you about the agent who handled all your issues so well. I'm sure he did but you have no idea what he charged the Landlord to do so as you were then the Tenant...

MAJOR point about your plan is to sell in two years...are you OK to hang on??  This is NOT a short term game and even in London after costs a buy/sell in 2 years on a new build with no increase on the value due to refurbishment is a risky proposition...especially on new build flats where there are other flats that are the same...that does bother me about your plan.  The regeneration is in 5 years but you want to sell before??  Most landlords have a view of either keeping these properties into retirement or selling them after retiring/during retiring, others buy to refurbish and then immediately sell on....I don't get your plan at all, I don't know anyone that bets on a two year gain on prices (even in London)....think about your overall long term strategy.

Sorry cannot be more specific in answering your question (in bold above) but for that you need a priest (a man closer to God than me) or a crystal ball (if you have one please lend it to me).

Best of luck though