Author Topic: Sell and free up equity?  (Read 285 times)

FireUK

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Sell and free up equity?
« on: October 03, 2018, 03:25:04 AM »
Trying to weigh up my options with regard to our house and balancing that with my life goals going forward.

We’re in the UK and bought our “forever home” about 4 years ago. It needed a complete renovation and we are just coming to the end of a large extension, which has doubled the size of the original house.

Original cost including stamp duty: £900k
Renovation & extension cost: £320k
Current market value: £2m

So we have added around £800k in equity. The work took around 15 months and I did much of it myself, working on it solidly full time for the whole period. I really enjoyed the work and would like to do another project soon. However, we have 3 kids and I wouldn’t want to do another project while we are living in it. It was too stressful with 3 kids and they deserve some stability now going forward.

The problem is that virtually all of our funds are now tied up in the house. Our mortgage is only £105k (this is the maximum we can borrow on current incomes) so we have around £1.9m of equity in our house but we only have around £20k in savings left. My wife works part time 2 days a week and the rest of the time looks after the kids. I wouldn’t want her to go back full time as I think it’s important that the kids have at least one parent around the whole time. I have a small self-employed business but the earnings from this are variable and earnings from it seem to be on a downward spiral. I don’t get much satisfaction from the business and I can’t see myself carrying on with it in the long-term, nor do I have the desire to. However, I do enjoy working from home and it’s great that the kids often have both parents around during the week.

Our total earnings don’t always cover our outgoings each month. We live fairly luxury-free lives and we are both fairly good at keeping our outgoings as low as possible. But obviously, if we continue in this manner then our savings will slowly erode.

I am only 37 so have a lot of working life ahead of me. I could go out and get a decent job paying c£50k but I will see less of my family and having sat in a cubicle for the first 3 years of my career after graduating, I sure as hell have no desire to be returning to such a life. I want to be doing things I actually enjoy and have the desire to do e.g. property developing, landscaping, furniture building. Basically, anything that requires a physical effort and you can see the end product at the end of the day. That’s what provides me with job satisfaction.

However, the problem is all my earnings from my career to date are now invested in our house, so it is now difficult to fund another property development. The only option that doesn’t involve selling out house would be to take out a bridging loan on our current house to fund another property renovation but at 1%pcm interest and 3% fees, most of the profit will be given to the finance provider. I also don’t like the idea at all of a large bridging loan being secured on our family home.

So what are my options?

1.   Sell up and rent
Sell the house for £2m, rent another house of a similar size for around £4kpcm (or maybe a smaller one for £3kpcm), invest the proceeds in the permanent portfolio (something I have read a lot about and I like the idea of a steady return with only small drawdowns – expected return 5% after inflation).

Pros
•   My investments would be making £100k per year after inflation and even though renting would eat into this return, I would still be accumulating my savings and compounding up each year. I would have free funds to invest in good value property deals and would not have to worry about development finance interest and fees eating into my profit;
•   Personally, I think the property market is looking very toppy at the moment and I quite like the idea of taking profit on our house and getting out of the market for the moment – it puts us in a good position going forward if the market were to crash and some decent bargains pop up.

Cons
•   If I’m completely wrong about the property market, then we will miss out on further tax free capital gains on our current house;
•   Renting does not provide stability for our family – our landlord could make us move with only a few months notice.

2.   Sell up and buy a smaller house
Sell the house for £2m and buy a smaller one in the same area for around £1m or less. This leaves £1m to invest in the permanent portfolio and other properties.

Pros
•   My investments would be making £50kpa after inflation and I would have no outgoings on rent. That return easily covers our annual outgoings – this frees us up to work when we want and doing what we want, without having to worry about how much we are bringing in each month;
•   More stability for the family;
•   If the property market falls, we are only losing x% of £1m rather than x% of £2m.

Cons
•   If the property market rises, we are only making x% of £1m rather than x% of £2m, but to be perfectly honest, I think I could handle that much better than holding on to our current property and seeing that value drop.

3.   Sell up and buy a house of equivalent size in a different area
Living just outside of London, property prices are far higher than in other parts of the country. We could move to a completely different area (we have often discussed living by the coast or in the proper countryside) and buy a house of the same size we have now, for around £1m.

Pros
•   As above, for option 2;
•   It would be nice to experience other areas of the country having lived in the same 25 mile diameter circle for the majority of my life.

Cons
•   We have integrated well into the current area where we live and made some good friends. The kids are settled at the local school. Uprooting and starting over would be difficult.

Any of these options provides us with a level of FI that we just do not have at the moment with so much equity tied up in our house. I would appreciate some thoughts on what the best option would be. Obviously, only we can really make this decision as a family but just getting other people’s thoughts often helps me consider things that I maybe have missed.

Talk to me. I’d like to hear other people’s opinions, particularly with regard to whether renting is such a bad idea? I’ve always been told that renting is dead money but is it really? If I can invest all this equity at 5%pa after inflation and rent a house then surely it is an option worth considering?
« Last Edit: October 03, 2018, 08:01:23 AM by FireUK »

SpreadsheetMan

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Re: Sell and free up equity
« Reply #1 on: October 03, 2018, 05:03:40 AM »
Option 2 looks obvious. You have far too large a proportion of your net worth in your house at the moment (i.e. all) and it leaves you very exposed.

How big is the house? Outside London and the London commuter belt £1M will buy a mansion.

FireUK

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Re: Sell and free up equity
« Reply #2 on: October 03, 2018, 05:30:24 AM »
Thanks for your reply Spreadsheet Man. I agree we are very exposed to the property market. House is around 4000sqft and within the London commuter belt. When I was planning the extension, I wanted to maximise the amount of sqft we could add to maximise the return from the plot, which is big enough to take a large house. It doesn't look out of place on the road either.

However, it wasn't until it was actually built did the scale of it dawn on me. Comparing to the houses of friends, I've realised we could live comfortably in a lot smaller house.

Papa bear

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Re: Sell and free up equity
« Reply #3 on: October 03, 2018, 06:09:34 AM »
Ok. Financially, you need to sell that house and put the equity to work.

Emotionally - how are you going to handle selling this place, knowing the work you put in and how it is your forever house?

I’m on the sell it side.  You can always buy something else and remodel again.  You are now just a slow real estate flipper =)


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FireUK

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Re: Sell and free up equity
« Reply #4 on: October 03, 2018, 08:01:09 AM »
Thanks for the reply PapaBear. Emotionally, I am fine about it. Yes I have put my heart and soul into it but I feel quite detached from it. My head is ruling my heart at the moment, as I know I could free up so much equity, put the money to better use and secure my family's future.

My wife however, is more emotionally attached to the house and having gone through 15 months of building work, she just wants to enjoy the house, and I can understand her point of view totally, even though I am of a different mindset.