UKC

Hello.

Some advice from the UKC hive mind is what I'm after.

While my aunt was in a care home I rented out her home to help with costs. The old girl died at the start of the year and I now own her house. It has an approximate market value of £200k. It's a semi in a nice area of Wakefield in a very good, recently renovated condition.

The tenants have asked if I would be willing to sell it to them.

Here is where I would like some advice from people who know more about property/investing/life than me.

I am currently getting £700 a month in rent. To me that feels quite nice to know that will be coming in every month from here on in and I will still have the house.

On the other hand I could sell, get the £200k and do something (I don't know what) with that money.

I have a part time job, I have no kids or debts and have very cheap tastes. What would you so in my shoes?

Much obliged in advance.

In reply to CPW:

Don't know but some thoughts:

For selling

a) There *will* be hassle with the house at some point - decorating, broken boiler etc etc. and you will have to deal with it which can be very time consuming

b) House prices are currently very high.  Who knows what next but it's difficult to see a big further rise

c) Good tenants are great but there is no guarantee they will stay and finding new ones isn't certain.

For keeping

a) What else is there to invest in currently that is more appealing/certain?

b) A house will always have value and you own it so no costs like stamp duty to worry about

c) Short-term at least it sounds like a good return

In reply to CPW:

I agree with pretty much everything MG said. I’d hold for the time being because there should, in theory, be a major price correction coming but with inflation being what it is I guess (and bear in mind that’s all it is so my advise is less than useless) people will be moving cash and bonds into property to prop up house prices to near their current levels. 

If you’ve been renting it already I assume it’s all up to date with gas, electrical safety certs etc. and you are holding their deposit correctly. 

In reply to CPW:

I don't know the first thing about renting and I'm not a financial advisor but I know the metric rental yield is used as a kind of "interest rate" type thing for renting. £700/£200k is 3.5% per year. Then you'll have any capital gain or loss on the value of the house as well. 

As someone said, there might be a correction soon, but on the other hand I'm pretty sure every time the quarterly figures come out hose prices have gone up "the most they have in the last 20 years" etc. etc., so you might find next quarter your house has gone up by another X% in value as well. People also keep saying supply and demand could prevent prices from dropping (who knows).

I would just ask what your risk appetite is like if you wanted to sell it, where would you put the £200k cash that would give you similar return on investment to the 3.5% now? Stocks - do you have the risk appetite for that? With inflation what it is, if you have £200k cash in your hand today it could be worth 10% less next year if you aren't getting inflation beating interest on it.

Also - if you are in no need of either the £200k capital, and have no mortgage coming up to renew (with the associated risks of negative equity if house prices fall), then the rising and falling value of the house doesn't really need to have a crystallised impact on you (unlike say if you needed to sell it to buy a bigger family home, or your mortgage was going to renew and you only had low equity in the house); unless the rent goes down with falling house prices, though I don't think your rent price would be that sensitive because assume there is a contractual arrangement in place at £700pm.

In reply to CPW:

You need to think about your mortality

You could bring forward your retirement, but if your work life balance is already good, is that what you want? 

Depending on how old you are, it might make more sense to sell up and fritter away the tax free* money or use it as a tax* free pension budgeting for it to run out when you die aged 100 leaping out of a window chased by the jealous spouse of your young lover. Or you could look at realistic estimates of your life expectancy.

*below inheritance tax threshold but don't rely on my ignorance for guidance

If you're younger, then rental income gives you financial security if your employer goes bust (or pisses you off!) and particularly at a time when inflation is rocketing.

In reply to CPW:

No expert, but just a thought.

If you sold it for 200k, you need to do something with the money.  Sat in a bank somewhere it will only loose value.  A house 'should' hold its value and 'hopefully' go up in the long term - although like MG said there will be costs associated with that. 

So I suppose the question is "Does investing in XYZ have greater returns / less financial risk than property?" - I think generally the answer is no, but my starting point would be research into what else you could do with 200K. 

In reply to CPW:

You'll get all sorts of opinions on here. Again I'd agree with most of the thoughts above.

Do you want the hassle of being a landlord? The direction of travel is of increasing regulation and restriction.

House prices could be at a peak at the moment - with interest rates increasing it's difficult to see how recent inflation could be maintained. Other countries that starting raising rates earlier are already 10-20% down. 

Obviously it depends on how old you are, what tax band you're in, whether you have a decent pension set up, your appetite for risk etc. If I had a £200k house I'd probably sell it and spread it across maximising pension contributions and ISAs (stocks and shares, not cash!) over a few years so I could benefit from tax-free growth and retire early, but then I don't want the hassle of being a landlord!

In reply to CPW:

One other thing to consider is that the laws on no fault evictions are tightening up so you may not be able to evict tenants and sell in the future whereas now it is still possible. So if the tenants are likely to stay for many years then this could end up being a long term commitment 

In reply to CPW:

This is not tax advice but if you sell a house that is not your residence aren't you liable to Capital Gains Tax on any profit?

As you did not pay for the house would that be CGT on the total sale price?

Certainly worth finding out what any tax liability would be, I assume you wouldn't want to give the tax man a large slice of the sale price?

In reply to CPW:

What I would in your shoes (you did ask) is take a BTL mortgage out against the property and use the proceeds as a deposit to buy another BTL. 

In reply to CPW:

If you sell, where would you invest the £200,000 if you don't actually need it right now? The best bank/building society savings rates currently quoted by Martin Lewis are between 1.75% and 1.81%, ( I haven't looked at the small print for these investments). 1.81% of 200,000 is £3,620 pa. You are currently getting £8,400 pa gross. In the current conditions it seems like a no brainer at least on the surface.

In reply to Andrew Lodge:

You pay tax based on the property's increase in value during your ownership, so if they plan to sell in maybe 5 or 10 years having it valued now at the point they inherit it would be very wise, especially if prices drop in the short term. 

In reply to Trangia:

It isn't just property and savings accounts

You can quite easily beat this return on share dividends, plus if drip fed into an ISA or SIPP this would be tax free, unlike the rental income. 

In reply to mik82:

True. But the property will almost certainly gain value long term, as well as provide income. If they already have a private pension, shares, isa etc... it's a good diversification of savings or pension pot. 

In reply to mik82:

Depends on the yields. One advantage with property is you can get an enhanced % return on rental income if using leverage/mortgages. 

In reply to CPW:

This is just the perspective of a long term renter who bought their rented property last year - to you it's an income stream but for them it's a home. I dunno about Wakefield but where I live there's a shortage of nice affordable first time buyer homes. When my terminally ill dad wanted to pass on some cash for me to buy a house last year we looked all over Bingley and couldn't find anything we liked as much as our rental, everything else had some drawback or another (too expensive, too small, too far from the station or on a busy road) that made it not as good. So we asked the LL if he'd consider selling and, luckily for us, he was amenable. Damp kitchen aside, I'm so happy he did it and we didn't have to move from a home we loved to escape from the rental trap. So, obviously what's best for you is important but selling it to your tenants could also have a really positive impact on their lives.

In reply to mik82:

Not without enhanced risk. Is that really sensible advice to someone who has told us that they lack investment experience?

In reply to UKB Shark:

75% LTV BTL mortgage is 2.69% for over 2 years or 3.19% over 5, each with a 2% arrangement fee so with a 3.5% rental yield you’re relying on capital growth during a recession to make your money. I know you’ve said you can get 10% returns but i think that will be tricky during a cost of living crisis

In reply to mik82:

If this is the case why is my pension showing a loss over the last year or so? Why am I paying (through my pension) someone a significant amount of money to fail to do something quite easy?

In reply to CPW:

........What would you so in my shoes?

Sell. For peace of mind and to avoid a tremendous amount of hassle

*Disclaimer*, this is not advice in any way, it's just what I would do in your shoes. It's just me

In reply to CPW:

Your return will go down as costs increase with time, at present you are in a golden period where you haven’t invested any of your own money, so nearly all rent is profit.  As mentioned above boiler, exterior paint work, windows ect. Will all need doing.  Plus complying with possible new regulations.  For example in Scotland landlords will have to get properties to EPC 3 standard, which If England followed could cost thousands.

Value with tenants will be retarded in time, due to wear and tear, as tenants won’t be as careful or do maintenance, the garden may go ‘wild’ ect. The next tenants could be shit (and that can be really bad) and with cost of living there must be an evens chance of house price falling, if that happens with following bad tenants you could be in problems and kicking yourself.

Consequently Id see if the tenants like the place so much they can stretch to 5-10% over the odds.
 If they can Id sell to avoid future hassle and walk with equivalent of 2-3 years rent upfront. If not if they are good tenants I’d keep them as long as they want to stay and sell when they leave, crossing fingers the market doesn’t go down .

Then think what to do with the cash….

My cousin has a rental portfolio; commonly he has to redo interiors completely for new tenants as the old ones have trashed the place. He can do that as the costs are covered by income from the portfolio spreading the risk.  Made me think that long term let with single property is a bit of a gamble.

In reply to CPW:

You have an advantage at the moment--time and no financial pressures.

Take your time and decide based on what you feel comfortable with. Be wary of anybody who tells you what is the best thing to do, only you can decide.

In reply to CPW:

It's worth considering that if you sell to the current tenants you save on paying an estate agent to sell it saving you ~1.5%. Also, of the current tenants decide to move on to buy something then you have to find new tenants which will cost you a month's rent at least + a few £ to spruce the place up. and the new tenants could be arses. 

In reply to CPW:

With tenants willing to buy I’d sell in a heartbeat, because (a) less hassle in my life and (b) the moral case in my mind for private landlords is weak - and weakening - in a country with insufficient housing.  In your shoes I’d probably offer a discount at 5% to 10% below a valuation (if easy to arrive at) for not having the hassle of marketing it and cutting out all interactions with estate agents including their fee.  If it was money I’d earned the discount would be lower, but sometimes you can afford to be generous and rapidly divest of hassle for a simpler, happier life.

Probably just as well I’m not a financial advisor.

In reply to ScraggyGoat:

Just a reminder, being a landlord is a job, not a hands-off magic money tree. Doing repairs, decoration and upkeep, in order to maintain the house in a condition fit for habitation is part of that job and is exactly what the tenants are paying their rent for.

In an ideal world, this would simply be a basic moral obligation, but fortunately for tenants it is a legal obligation too.

For balance, I'm not advocating in any way that tenants should be "trashing the place" or living carelessly, (although I have no idea why they should be expected to do any maintenance beyond reporting?!) but the tone of your comment came across as landlords having to bend over backwards when in fact all they are doing is the job for which they are paid to do. Remember who has the upper hand here in the grand scheme of things.

In reply to wintertree

Buying a property doesn't suit everyone, for some they can't afford it and there's many possible reasons for this, for others it just doesn't fit with their current life circumstances.

We recently had to move for work reasons and the lack of rental property was a real problem. In Wales especially, the rental market is very thin and rents are high. This is due to a combination of  people cashing in on the high house prices with the view that they are at a peak and due to drop, and people getting out of the market before what some see as new onerous rules being implemented by the Welsh government in December. 

Unless the council's/housing agencies are going to step in and build some houses we still need private landlords. And seeing as nobody's managed to honour their promises on house building for decades I'd say we still need private landlords.

In reply to all: thanks for all the replies so far. I was hoping for a unanimous response one way or the other but I'm not surprised there are voices for each option!

For info and to answer some questions, I'm in my early 50s and have a very low risk attitude to investing. I know next to nothing about it. I have no real clue what to do with £200k to provide a long term and secure income for myself.

My part time income isn't enough to cover my monthly costs so I do need something extra, and working full time is not something I want to do to make up the shortfall.

I appreciate climbingpixie's view that it would be a nice thing to do for someone else as they like the house and family are close by. That is one emotional aspect, the other similar aspect is that I am perhaps not quite ready to let the house go yet as it has been a home from home for me for 50 years for various reasons I don't need to go into here.

In reply to Tyler:

Yes you’d want to be looking for a better return from the next property. Double digit yields are still possible if you know where to look. All will be revealed at my next investment seminar - tickets still available. 

In reply to CPW:

My 2p:

I was an accidental landlord for a while and it was a relentless PITA. Just because your current tenants are okay doesn't mean the next lot will be (one assumes they'll be looking for somewhere else to buy if you don't sell to them).

There was an article in the Economist a while back saying that property isn't quite the investment class it's cracked up to be because people often discount all the expenses, taxes etc - over the long run equities provided a better return.

In reply to gethin_allen:

Totally agree - and I have rented as a tenant before.

I don’t have a problem with rental properties, but I don’t think it’s acceptable to have for-profit rentals through private landlords when housing supply is constrained beyond demand.

If I was in charge, I’d allow private rentals through social housing companies with the later in charge of the rent, servicing and tenant liaison and a cap on profit to the landlords based on some rational metric.  This would fairly accommodate people who want a temporary multi-year break from their home (eg moving abroad for a period of hope to move back when they can get the right job - “accidental landlord” as featuresforfeet puts it well) or who want to take time to decide what to do with their inheritance but it leaves no scope for maximising profit and driving up rent in a way that shafts the very people you rightly make a case for consider - those whose needs are better met by renting.  

> Unless the council's/housing agencies are going to step in and build some houses we still need private landlords. And seeing as nobody's managed to honour their promises on house building for decades I'd say we still need private landlords.

All good points.  The OP sounds like they’d be a good landlord and could afford to run at low profit and sell when the time is right for them, rather than be a ruthless exploiter of tenants.

In reply to CPW:

I would keep the house. Being a landlord is money for old rope, and that is especially true when there's no mortgage involved. 

There might be a small correction coming up in the market, but the fact of the matter is that as a country we have an ever ballooning population, and we don't build anywhere near enough houses.

The odds of that house being worth less than it is now, in 5 years, is imo nil.

The house being rented out is making 4.2% return on investment per year, not including any rise in the value of the house itself..

You reckon you can beat that, in an equally low risk manner? I think it'd be difficult. 

In reply to featuresforfeet:

Totally agree . But only if you are confident and understand investments. 

In reply to CPW:

At age 50, I would be considering my retirement and would adopt a strategy similar to this:

Retain the property, over the next 10 to 20 years, it will grow in value. Engage a parasite, sorry, letting agent to manage the property for you. They are poor value for money but take away a lot of hassle. Take only what you need from the profit, pay the remainder into your pension to take advantage of the tax allowance and any employers contribution this will diversify your investment. If you need accessible funds then put some in an isa.

Alternatively, spend it all on champagne and call girls, you will smile.

In reply to CPW:

Well, nobody knows really, do they?

Your tenants will be off in any case - they would like ot buy this house but, if not, there'll be another.  Then you might get difficult tenants.  Or you might not.

Assuming you already own your own home I'd probably keep it.  You can always borrow against it if you need the cash.

In reply to CPW:

I haven't read any of the posts, but I'd keep hold of it for now. Pretty good ethical investment if you don't over charge. How would you invest the money otherwise? Always there to sell if you need to.

In reply to mishabruml:

I think we are both in agreement and you have misinterpreted my general theme that there is alot of work and costs associated.

Risks however are clear, my cousin has had multiple properties trashed. He always refits, refurbishes and redecorates  ahead of new let, so the accom is in very good order for the incoming tenant. It is his job. But he is very realistic in that you never know for certain how a tenant will turn out.  In his words if he arranges to inspect ‘I don’t know if I’ll be wiping my feet on the way in and the way out!’

Ive have known several friends forced into renting and many have had significant issues with tenants and damage well beyond wear and tear, plus neglect.  They have all found that actually getting any financial compensation  is very very hard.

Conversley I have helped match friends whom are in dire need of accommodation with others in need of a good tenant and provided references etc.  some are still in place years later. In one case a got a bottle of whiskey from both the tenants and another from the landlord as thanks.

In reply to CPW:

Where exactly would you invest £200k? If you don't know, (and I don't), then hang on to something you do know something about, I.e. bricks and mortar.

Renting can be a hassle, but you don't have to be a slum landlord, just treat your tenants as you would like to be treated, I.e. be prepared to fix problems in a timely manner if you can, or pay someone else to do so if you can't - you'll still be quids in.  (Even if your costs equal income in a given year, the house will still be appreciating, and big costs- a new boiler, kitchen or roof say, aren't net costs, because they will increase the value of the property.)

If you want to let the tenants down gently, say that the house has sentimental value and you haven't ruled out living there at some point in the future...

In reply to wintertree:

Who would pay for these companies?  

In reply to neilh:

I think it was averaged out across all equities - i.e. effectively comparing to a tracker, but yes agreed there are pitfalls with that too

In reply to Jim Hamilton:

The tenants would pay for these regulated, non-profit companies.  As with letting agents, but regulated like housing associations not for-profit.

In reply to Tyler:

Because your pension should mostly be invested to provide long term capital growth over periods of far more than a year, and it's inevitable you'll get fluctuations. My ISA is down 20% over a year due to this year's terrible stock market performance but still +75% over 3 years.  and + 100% over 5.

I was talking more about the ease of beating savings account returns if you were investing for income. For example I hold a relatively low risk property fund that yields 4.5% tax free within an ISA, and that's before any capital growth.

In reply to CPW:

Radical idea here, how about selling a half share to your tenants (and still getting half rent), become joint owners.

I realise that setting it up may be unusual and hence more tricky (the obligations on both parties will need to be very carefully considered and defined) but there are advantages which address some of the points raised above.

No doubt others will be along to show why this is a rubbish idea, I've not got any experience of this, merely thinking outside the box.

In reply to CPW:

house prices will continue to rise over the next 7 to 10 years, it will be worth a lot more by then, keep it, rent it, put some of the rental into a 'pot' for repairs and refurbishment and sell it later...a nice retirement lump sum or extra income. Property is still the best investment with a good return. You will miss it if you sell.

In reply to CPW:

What is your own housing situation? Do you own or are you renting? If you own, are you mortgage free?

Would you ever want to move into this house?

In reply to Jim B:

It’s an  investment that produces a return that people feel comfortable with as it is bricks and mortar.

In reply to ExiledScot:

I got stung with this one,  we bought our house for 20k, it was a total shed and we spent the next 15 or so years renovating it whilst living in it.  I became an accidental landlord helping the sister in law out and 5 or 6 years later when we sold the house for 70k we got stung for a lot of tax.  We had no intention of renting it so we didn't keep the receipts for the money we spent and I did most of the work myself.