Author Topic: Case Study - Inherited house  (Read 1199 times)

UKMustache

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Case Study - Inherited house
« on: February 17, 2017, 02:57:52 AM »
I'll keep the back story to a minimum as it isn't relevant, short version is that a relative has passed away and left a house to my wife. 

After weighing up the options, selling the house was ruled out and so was moving in ourselves.  We don't need a lump sum of cash right now and we like where we live.

A lot of relatives / neighbours have thrown in their opinions (which are invariably different to ours); that has left me wondering if we have evaluated the rental potential properly.

There is no mortgage and it's unlikely we would change that while we see how difficult this landlord business is.

Value - 200k (210k if refurbished)
Gross rent - 825-850 per month / 9,900-10,200 annually

Landlord insurance - 150
Gas safety certificate, EPC certificate, deposit protection fund fee - 160 *
Advertising & tenant vetting - 800 (quotes from letting agents between 495-800) *
Ongoing maintenance - 1,000 (roughly 10%)
Taxes - 1,820

Net rent - 522 per month / 6,270 annually

*The costs above would be year 1 of a tenancy
The property is in a family friendly residential area so I'm hoping tenants will stay for more than a year BUT I have allocated those one off costs to cover vacant periods in the following years (my wife thinks this is overly pessimistic).  In total this is roughly an extra 10% set aside to cover those time the property is empty.

I've been following properties coming onto the market over the last month and similar properties are generally let within 7 days.  This is the busiest time of year for our market though, so it might be a bit longer if a tenant moved out say in December.

We plan on spending 2-3k upfront on new carpets, some electrical work (needed to meet current regulations) and generally decorating in a more modern style (it is very old fashioned).  We would need to do this whatever we decided to do with the property.

We will also set aside 5k from day 1 to cover any significant repairs while the maintenance money builds up.

Have I missed anything?  Is there a huge hole in our planning that I just can't see?  Any advice appreciated.

MostlyBearded

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Re: Case Study - Inherited house
« Reply #1 on: February 17, 2017, 07:00:28 AM »
Hey UKM, sorry to hear about your relative.

I don't know if there are other factors in play here, so just wondering why are you ruling out selling the property now?

Hotstreak

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Re: Case Study - Inherited house
« Reply #2 on: February 17, 2017, 09:45:09 AM »
Hey UKM, sorry to hear about your relative.

I don't know if there are other factors in play here, so just wondering why are you ruling out selling the property now?

I have the same question.

Rents seem low compared to the value - I would think that selling this and investing elsewhere would get you greater returns.

UKMustache

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Re: Case Study - Inherited house
« Reply #3 on: February 17, 2017, 10:30:44 AM »
Hey UKM, sorry to hear about your relative.

I don't know if there are other factors in play here, so just wondering why are you ruling out selling the property now?

I have the same question.

Rents seem low compared to the value - I would think that selling this and investing elsewhere would get you greater returns.

Thanks for the well wishes Nameswhack.

In answer to the question, there are a few reasons.  I'll start with the least logical and work backwards.

Firstly, my wife has a sentimental attachment to the property.  As I stated, she doesn't want to live in the house at the moment but that's not to say she won't ever want to live there.  This might change in a few years time when everything isn't so raw.

Secondly, she is also quite conservative.  She doesn't have the same faith that I have in the stock market and is of the opinion that diversification of income is a good thing.  She told me when I suggested this today that she would not consider putting a lump sum into index funds at all, she's fine with adding the rental income to our monthly investment amount though.

Finally a large amount of cash like the 200k from the sale would be difficult to deal with. 
It would take approximately 10 years to get that in tax sheltered investment accounts (due to annual limits and what we already use of those limits) and in the mean time we would pay tax on both dividends and any capital gains made as we transferred the money over.  This would be either 7.5% or 32.5% on dividends (depending on our earnings that year) and 18% or 28% on gains (again depending on our other earnings).  We are not in the higher rate at the moment, but we aren't a million miles away.  I'm 27 and she's 29 so our salaries are still rising quickly.

I hope that explains why we are likely keeping hold of the house, there are some workarounds to the above taxes however I work in tax compliance for the government and could lose my job if I don't do everything to the letter of the law.


In reply to the point about selling this and buying elsewhere, as we have inherited this house there are no taxes to pay on the 'purchase'. 

The current government is trying to discourage buy to let and has recently introduced additional taxes for the purchases of second properties. 
If we bought another property we would have to pay 5-8% of the value as tax up front, (on top of the other associated costs like estate agent fees, property surveys and so on).
It's also unlikely we would get something with a higher yield without looking at the more desirable suburbs around the city; we would also need a mortgage to afford those areas; another recent government move was to remove tax relief on mortgage interest for landlords.
« Last Edit: February 17, 2017, 10:32:55 AM by UKMustache »

bosspross

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Re: Case Study - Inherited house
« Reply #4 on: February 17, 2017, 04:33:12 PM »
First off I'm sorry for your loss.

I am going to copy and paste this here:

"A rule of thumb used to determine if the monthly rent earned from a piece of investment property will exceed that property's monthly mortgage payment. The aim of the one percent rule is to have the rent be greater or equal to the mortgage payment, so the investor breaks even on the property at worst. The rule is used for quick estimation, as there are other costs associated with a piece of property that are not taken into account, such as upkeep, insurance and taxes."

Read more: One Percent Rule Definition | Investopedia http://www.investopedia.com/terms/o/one-percent-rule.asp#ixzz4YzJmV3h8

Personally I aim for 2% when looking at rentals and the fact that yours only hits .5% means you most likely would not make any money. I think at some point you and your wife need to think about how important it is for you to live there. You can sit on the property for awhile and just pay the taxes without losing too much and wait until your wife is ready to talk about it. I would do that before jumping in and getting tenants. Also, 10% vacancy is not pessimistic at all.



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Re: Case Study - Inherited house
« Reply #5 on: February 17, 2017, 05:16:09 PM »
Condolences to you and your wife.

I have a rental which is worth a lot more and is rented for about what you are getting, so your figures don't look too bad to me.  But, like you, it is not a purely financial by the numbers decision.

I think the 1% rule quoted by bosspross is a US measure not a UK one.  Capital appreciation in the UK is different, too.

I think the rental business in the UK is likely to see quite a lot of changes.  There is the change in stamp duty, the removal of mortgage interest relief, and the recent White Paper (Fixing our Broken Housing Market).  The costs of buying and selling are becoming prohibitive, and the loss of mortgage interest relief makes the old system of minimum capital and maximum borrowing less attractive too.  I think the situation you are in: holding a reasonably priced family home for long-term rental will make quite a lot of sense in this new world and will be much more the norm than it has been.    Once a property is in good order and let to long-term responsible tenants who pay rent on time, I find the effort is minimal.

A reputable letting agency, careful tenant selection and keeping tenant turnover to a minimum is key: it's not just loss of rent if a tenant leaves but letting expenses are substantial and the costs of an empty house, such as council tax and water bills mount up quickly (while tenanted the tenants should be paying the council tax, there are also exemptions where the occupier is recently deceased).  The other thing to look out for is maintenance.  You will need to budget for regular repainting as a minimum, and I recommend regular inspections to check that all is well (the lease should specify this).   Set up relationships with local trades in advance: I 've found it helps a lot to have relationships with dependable, independent local trades who know the property and who can deal with regular or emergency repairs.  Depending on the property it might be worth arranging for a regular gardener and including the cost in the rent: I find that most tenants won't want to do more than mow the lawn, if that.
Be frugal and industrious, and you will be free (Ben Franklin)

Hotstreak

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Re: Case Study - Inherited house
« Reply #6 on: February 17, 2017, 09:01:19 PM »
It sounds like the hang ups are
- Your wife has an emotional attachment to the home
- Your wife has different ideas about investing than you do.


I would rent the home for a year.  During that year, work to get on the same page investment wise.  After the year is up, re-address the idea of selling the house.  The most simple option would be to put the money in an REIT.  That should satisfy the diversity requirement by keeping it in real estate, and should also have significantly more returns.

MostlyBearded

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Re: Case Study - Inherited house
« Reply #7 on: February 23, 2017, 06:27:05 AM »
Hey UKM, sorry to hear about your relative.

I don't know if there are other factors in play here, so just wondering why are you ruling out selling the property now?

I have the same question.

Rents seem low compared to the value - I would think that selling this and investing elsewhere would get you greater returns.

Thanks for the well wishes Nameswhack.

In answer to the question, there are a few reasons.  I'll start with the least logical and work backwards.

Firstly, my wife has a sentimental attachment to the property.  As I stated, she doesn't want to live in the house at the moment but that's not to say she won't ever want to live there.  This might change in a few years time when everything isn't so raw.

Secondly, she is also quite conservative.  She doesn't have the same faith that I have in the stock market and is of the opinion that diversification of income is a good thing.  She told me when I suggested this today that she would not consider putting a lump sum into index funds at all, she's fine with adding the rental income to our monthly investment amount though.

Finally a large amount of cash like the 200k from the sale would be difficult to deal with. 
It would take approximately 10 years to get that in tax sheltered investment accounts (due to annual limits and what we already use of those limits) and in the mean time we would pay tax on both dividends and any capital gains made as we transferred the money over.  This would be either 7.5% or 32.5% on dividends (depending on our earnings that year) and 18% or 28% on gains (again depending on our other earnings).  We are not in the higher rate at the moment, but we aren't a million miles away.  I'm 27 and she's 29 so our salaries are still rising quickly.

I hope that explains why we are likely keeping hold of the house, there are some workarounds to the above taxes however I work in tax compliance for the government and could lose my job if I don't do everything to the letter of the law.


In reply to the point about selling this and buying elsewhere, as we have inherited this house there are no taxes to pay on the 'purchase'. 

The current government is trying to discourage buy to let and has recently introduced additional taxes for the purchases of second properties. 
If we bought another property we would have to pay 5-8% of the value as tax up front, (on top of the other associated costs like estate agent fees, property surveys and so on).
It's also unlikely we would get something with a higher yield without looking at the more desirable suburbs around the city; we would also need a mortgage to afford those areas; another recent government move was to remove tax relief on mortgage interest for landlords.

Sorry haven't checked in here for a few days!

Hmmm. I see your points, I hadn't taken the tax implications into account. On paper this property perhaps wouldn't be one you would go out and buy, but given the circumstances of you acquiring it you would lose some of it's value to the tax man and without knowing your exact numbers, I'm not sure how much that would be.

There are certainly better and worse investments than this, but perhaps given your wife's feelings it would be better to hang on to it and rent for now and reassess the situation in future. I don't know how far away your plans are to FIRE but I have learnt through my own marriage that it's worth compromising the 'most optimal' strategy sometimes for the sake of keeping everybody happy and still moving towards the target.

Hope you figure it out, keep us posted how it goes.

NW
« Last Edit: February 23, 2017, 06:28:39 AM by Nameswhack »

UKMustache

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Re: Case Study - Inherited house
« Reply #8 on: February 24, 2017, 03:22:10 AM »
Sorry haven't checked in here for a few days!

Hmmm. I see your points, I hadn't taken the tax implications into account. On paper this property perhaps wouldn't be one you would go out and buy, but given the circumstances of you acquiring it you would lose some of it's value to the tax man and without knowing your exact numbers, I'm not sure how much that would be.

There are certainly better and worse investments than this, but perhaps given your wife's feelings it would be better to hang on to it and rent for now and reassess the situation in future. I don't know how far away your plans are to FIRE but I have learnt through my own marriage that it's worth compromising the 'most optimal' strategy sometimes for the sake of keeping everybody happy and still moving towards the target.

Hope you figure it out, keep us posted how it goes.

NW

That's okay, I haven't been around much either.  Now we've had a little time to reflect, we still feel that we're doing the right thing and that it makes more sense than a knee-jerk 'sell sell sell'.
Further conversations with the people that put the original doubts in my mind have led me to realise that they are not financially savvy.  They just see a potential windfall to spend on luxury living a couple of years.

Things are moving along nicely, we're trying to have the house ready to let in mid-April (which means an incredible amount of work for me!). 

Progress is as follows:
  • Most of the furniture has been either given to charity or taken apart
  • We've measured up and had quotes for new carpets throughout (lower than my original estimate)
  • I've painted about 35% of the interior woodwork, it's time consuming (and boring) but cheaper than a decorator
  • I've started stripping the wallpaper and will hopefully finish that this weekend
  • Sentimental items have been boxed up to be dealt with when everything is less emotional
  • I've spoken to a couple of agents, they think we're more likely to achieve 875-900 per month.  That was a nice surprise.

The to-do list seems to be expanding but we'll get there.  Outstanding at the moment (that I can remember offhand):
  • Re-tile over the truly awful floor to ceiling tiles in the kitchen (70's brown pattern in an otherwise modern kitchen)
  • Take down the rotten summer house
  • Remove and dispose of old carpets (saved 120 on the carpet quote)
  • Replace unsafe plug sockets
  • Empty the garage, not looking forward to this one.  It's full of years of rusty tools etc.
  • Dismantle the wheelchair ramp (15ft!) on the driveway
  • Paint ceilings, doors, skirtings and frames

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Re: Case Study - Inherited house
« Reply #9 on: February 24, 2017, 03:44:43 AM »
Lots of hard work, but should be worth it.

On the wheelchair ramp, it might be useful to a potential renter, so even if you don't want to leave it in place you could perhaps leave it available to be reinstalled if appropriate, and it can be mentioned in the rental particulars?  Otherwise, try giving it away on something like freecycle/freegle/buy nothing groups.  One of the houses I let has (much shorter, admittedly) ramps left in place that do not seem to be an issue.  Also, they make moving furniture much easier.
Be frugal and industrious, and you will be free (Ben Franklin)

UKMustache

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Re: Case Study - Inherited house
« Reply #10 on: February 24, 2017, 08:05:37 AM »
Lots of hard work, but should be worth it.

On the wheelchair ramp, it might be useful to a potential renter, so even if you don't want to leave it in place you could perhaps leave it available to be reinstalled if appropriate, and it can be mentioned in the rental particulars?  Otherwise, try giving it away on something like freecycle/freegle/buy nothing groups.  One of the houses I let has (much shorter, admittedly) ramps left in place that do not seem to be an issue.  Also, they make moving furniture much easier.

That's a good idea, I'll see if it dismantles into sections as it'll be a bit unwieldy otherwise.