Author Topic: UK Croydon: rent or sell  (Read 1399 times)

FIFTWUK

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UK Croydon: rent or sell
« on: August 06, 2018, 09:37:42 AM »
Thank you MarsherLady for the hint, hopefully I could get a UK perspective on whether to sell or rent my current flat.

I am considering (potentially temporarily) leaving the UK.
Selling or renting decision in the UK has some specifics: potential drop in property prices after Brexit potentially offset by unavailability of credit, currency fluctuations depending on Brexit negotiations, tax development on the BTL front , local council renting schemes etc. etc.

Market Value: ~290k (I had 3 separate valuations done in the last 6 months and they varied between 270-330k, the worst one being the last one (closest to Brexit) which also suggested that there aren't that many buyers around atm)
Original Purchase price: 197k
Original Mortgage Amount: 150k
Interest Rate: 3.54%
Mortgage Term: 5 year fixed
Term remaining: 1 year, allowing me to remortgage with the same supplier 4 months beforehand
Amount remaining on mortgage: 102k
Gross Rents: 1000, the rents have dropped by 100-150 in my area in the last year but having a garden and being this close to the station should reduce the vacancy rate if I stick with the lower rental number
Separately the garage currently nets 70/month
Principal and Interest: P of mortgage ~530, I of mortgage ~300
Taxes and Insurance: Lettings, contents and liability insurance approx 40/month (this actually includes some buildings insurance but I haven't had confirmation how much, if at all, it could reduce the overall premium if they took it out)
One off cost of agreeing with the mortgage provider for the property to be let: 275
Croydon council letting scheme (up to once every 5 years): 350 (since it is a single property)
0% income tax due to personal allowance and tax credit of up to 20% of mortgage interest
HOA costs: Buildings insurance & ground rent is covered in 120/month
If I were to let via one of the local lettings agencies, they'd charge 300 tenant placement fee, 135 tenant renewal fee and 12% running costs for actually managing the whole process for me (also organizing any repairs, etc.), 80 for inventory/condition out survey
one off 125 for inventory condition
Deferred maintenance notes: Recently renovated property, so 0

I am considering the two options because
1) I'm not sure if my move is permanent and I like the property that I own and would prefer to move back if needed BUT if I do sell it, I could put 30k of the proceeds in an ISA fairly sharpish after the sale (therefore protecting it from any tax forever),
2) there are some tax benefits if I keep the property (I'd be moving overseas where they do not have personal allowance, which would make this rental 'tax free' + I'd get 20% tax credit on mortgage interest allowing me to extend the mortgage term and benefit on some of the potential income from a limited company (not sure how much as I don't have a lot of revenue through it yet)),
3) it might help me retain permanent residency if it becomes a problem after 2 years.

I have considered letting the property myself (via Gumtree or similar) at least from the start since I do not expect massive issues with any repairs or similar, but I have provided the numbers from a well respected local lettings agents and have run the maths with these numbers. I've also assumed 10% vacancy, 5% repairs and remortgaging in February 2019 to 1.98% 5-year fixed borrowing 130k to get cash ROI very close to zero, but total ROI 4.60% (on the purchase price).
I have also ran the numbers at 3.54% and the current repayment plan, but that made cash ROI very close to 0% and the total ROI around 3% so I think the sensible thing, if letting, is to extend the mortgage to 25 years and look at my situation in a few years; I can always overpay at the end of the 5 year term if I move back and wish to repay it earlier or I can always borrow more, to even further hedge against Brexit/not being able to put the money in an ISA wrapper.

To explain, I find the option of borrowing more (and not focusing on repayment) a possible hedge to Brexit risk - and have assumed borrowing additional 30k to cover whatever I have left at this year's ISA and next. If I use the current estimated value of the property, I can clearly see from the total ROI being below 2.5%, that this is really not a great rental.
Not really a surprise and really looking to see if you think that the sentimental value of potentially being able to move back outweighs the gamble of Brexit.

The alternative is obviously selling, but I'm conscious that I might need to sell the property cheaply at this stage since it looks like buyers are waiting for Brexit to happen and that I'd need to invest this money outside of the ISA wrappers (from what I can tell, I'd be taxed on dividends above 2k and if the capital gains are ever above 7% or so (170k*7%=11.9k), I'd be at risk of paying Income Tax on over and above as well; as opposed to flying under the radar (since you also get tax credit equal to 20% interest paid)).

Any thoughts would be appreciated.

FI-42

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Re: UK Croydon: rent or sell
« Reply #1 on: August 19, 2018, 10:03:53 AM »
You'll need to remortgage as a let property, which will bump up the mortgage rate.

I find property managers poor value for money and as such would only consider self management - which is not an option in your case as you'll be overseas.

Whatever you do, don't let it out to the council.  The council tenants will likely destroy it and you won't be able to get your property back under your control (you'll be in a 10 year contract or something of that nature) so if you come back and buy again you will get stung for the second property supertax.  The council option is for hard-nosed operators only.

Anyone sentimental about their properties should not let them out.  I would consider an ROI of 5% and under very poor - especially considering that if your property falls in value you'll be leveraging your losses if you have a mortgage.  I don't think having property in the UK will help you retain your ILR, and hedging against Brexit is simply gambling.  You have 2 years overseas to see how Brexit pans out and decide if you want to be in the UK or not.  As such I would sell it.

daverobev

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Re: UK Croydon: rent or sell
« Reply #2 on: August 19, 2018, 01:14:51 PM »
Where you are moving to is relevant. Your ISA is only tax sheltered in the UK. If you keep it, you will pay tax on income to the tax authorities in your new home country. You will still pay cap gains to the UK first when you sell.

1000 GBP on 300k is shit, and you have a lot of expenses listed - outrageous lettings agent fees too, IMHO. I would just sell. Been there, done that - property is a PITA, especially remotely (and you still have to do a self assessment tax return if you are under the personal allowance).

FIFTWUK

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Re: UK Croydon: rent or sell
« Reply #3 on: August 21, 2018, 03:33:54 AM »
That you for your much valued responses, indeed food for thought.

May I ask, what type of ROI would you normally be looking for (considering the UK market is presumably different to the US one) and what are the letting fees you've experienced?

daverobev

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Re: UK Croydon: rent or sell
« Reply #4 on: August 21, 2018, 12:00:04 PM »
That you for your much valued responses, indeed food for thought.

May I ask, what type of ROI would you normally be looking for (considering the UK market is presumably different to the US one) and what are the letting fees you've experienced?

I think I was paying 9% management. If I was actually looking to buy somewhere, I'd want to be getting at least gross 0.6% a month - so 600 quid on a 100k place, say.

Differences between North America and the UK (broadly) - in NA, the owner pays the property tax where in the UK, the tenant pays council tax. Also, much less chance of being sued - as shown by the cost of insurance. I was paying maybe 110 quid a year for insurance on a 160k+ property in England; while much worse coverage is costing $42 a month on a $40k house in Texas.

But plugging the numbers in, 0.6% a month = 7200 gross a year, less vacancy and management fees (say 10% for the former, 10% of 90% for the latter), so 1400 or so. Less insurance and maintenance - say another 800. That gives you something like a 5% return. Not amazing. That's why it is the minimum you'd want to look at.

House prices historically track inflation. I use that, so I assume I'd get 5% 'dividends' and inflation 'capital gains', if you like. Of course the 5% has to pay the mortgage. And there are boilers, hot water tanks, etc etc - in theory the maintenance fund covers that but you can be unlucky.

Remember - a house can cost you money. Literal, taking money from elsewhere in your life (if you don't have a sufficient emergency fund - which is more likely with just one property vs half a dozen). $100 in the stock market can only go down, it doesn't force you to replace a boiler else start losing more value... (I've seen this written more eloquently and written it better myself but I hope you get what I'm driving at!).

skip207

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Re: UK Croydon: rent or sell
« Reply #5 on: August 21, 2018, 02:35:40 PM »
We are just in the process of selling our rental property.  Was ok for a few years but now needs a refresh and if we do that its taking a massive chunk of any profit we made for the last 2 years so decided to sell.   I would consider our tenants pretty good overall but the level of wear and tear in the property was eyewatering.  Once you start having to do things like bathrooms and kitchen its serious money. 

FI-42

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Re: UK Croydon: rent or sell
« Reply #6 on: August 23, 2018, 12:41:49 PM »
That you for your much valued responses, indeed food for thought.

May I ask, what type of ROI would you normally be looking for (considering the UK market is presumably different to the US one) and what are the letting fees you've experienced?

I think I was paying 9% management. If I was actually looking to buy somewhere, I'd want to be getting at least gross 0.6% a month - so 600 quid on a 100k place, say.

Differences between North America and the UK (broadly) - in NA, the owner pays the property tax where in the UK, the tenant pays council tax. Also, much less chance of being sued - as shown by the cost of insurance. I was paying maybe 110 quid a year for insurance on a 160k+ property in England; while much worse coverage is costing $42 a month on a $40k house in Texas.

But plugging the numbers in, 0.6% a month = 7200 gross a year, less vacancy and management fees (say 10% for the former, 10% of 90% for the latter), so 1400 or so. Less insurance and maintenance - say another 800. That gives you something like a 5% return. Not amazing. That's why it is the minimum you'd want to look at.

House prices historically track inflation. I use that, so I assume I'd get 5% 'dividends' and inflation 'capital gains', if you like. Of course the 5% has to pay the mortgage. And there are boilers, hot water tanks, etc etc - in theory the maintenance fund covers that but you can be unlucky.

Remember - a house can cost you money. Literal, taking money from elsewhere in your life (if you don't have a sufficient emergency fund - which is more likely with just one property vs half a dozen). $100 in the stock market can only go down, it doesn't force you to replace a boiler else start losing more value... (I've seen this written more eloquently and written it better myself but I hope you get what I'm driving at!).

You said it well!

Rinch

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Re: UK Croydon: rent or sell
« Reply #7 on: November 20, 2018, 09:11:12 AM »
I left the UK about 7 years ago and kept a flat that I've rented out since. I've been lucky. Very little significant maintenance, 100% occupancy, a period of rising prices and all admin done by me so no management charges.

In terms of cash flow, depending how good your rental and how conservative you are with maintenance is, you will probably end up with a return of somewhere between 2-4% of the value of the asset. Mine is probably about 3% so your estimate is probably about right.

Obviously you might get some capital appreciation as well. Though it's hard to look at the property market in the south east and predict a boom given the current uncertainties but clearly no one knows. There is also the potential that you could lose a good bit here too at least in the short term.     

Having said that from my perspective the personal allowance effectively means that any income from this is tax free. Of course this may vary depending which country you're becoming resident in. This is a big benefit to you and could save you a couple of thousand a year compared to having a taxable income producing asset. If you bought shares, capital gains can be as much as 30% in France for example when you sell. Suddenly your 3% tax free is as good as a nearly 4% market return.   

One thing to flag is that as soon as you leave the UK you will lose access to the UK mortgage market. If you want to get a new mortgage deal after you leave, you'll need to go to a specialist non-resident buy to let mortgage provider and the rates will be higher than you are used to. Be sure to get the longest best deal you can before you leave. My mortgage has been left at the banks variable rate because changing it to anything else is more expensive.