Author Topic: Sell the property or remortgage it?  (Read 1691 times)

Jebby

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Sell the property or remortgage it?
« on: November 05, 2016, 02:40:11 PM »
Situation
  • Male, 24, London, UK
  • I purchased a 125,000 apartment a couple of years ago using a mortgage.
  • I currently own about half of the equity (~65,000) in the apartment and expect to pay off the mortgage in 4-5 years.
  • My long-term goal is financial independence through passive income.

Should I...
  • Remortgage the property before (i.e. now or soon) paying off the mortgage to put down a deposit on a second property?
  • Sell the property after paying off the mortgage to put down deposits on second/third properties, losing the rental income of the first property?
  • Remortgage the property after paying off the mortgage to put down deposits on second/third properties, keeping the rental income of the first property?

Furthermore, when I do get to the point where I can purchase a second property, is it worth splitting my investment between the deposit and some reputable dividend stocks? i.e. It is better to go 100% property or diversify with both property and dividend stocks?

SwordGuy

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Re: Sell the property or remortgage it?
« Reply #1 on: November 05, 2016, 05:01:01 PM »
You would need to supply a lot more info than you have for someone to feel comfortable giving a definitive answer to all your questions.

In general, I'm a fan of diversification.  I prefer multiple income streams that are not too tightly coupled.  That way, if one goes wrong, the other may still be fine or, at least, recover faster.

Here's my question for you.

What happens if you lose your job for an extended period of time?   That could be because of market conditions or health.

And something big and expensive breaks in your rental property?   At the same time, of course.

How long can you handle the situation before it all comes down like a house of cards?


Jebby

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Re: Sell the property or remortgage it?
« Reply #2 on: November 07, 2016, 02:27:34 PM »
You would need to supply a lot more info than you have for someone to feel comfortable giving a definitive answer to all your questions.

In general, I'm a fan of diversification.  I prefer multiple income streams that are not too tightly coupled.  That way, if one goes wrong, the other may still be fine or, at least, recover faster.

Here's my question for you.

What happens if you lose your job for an extended period of time?   That could be because of market conditions or health.

And something big and expensive breaks in your rental property?   At the same time, of course.

How long can you handle the situation before it all comes down like a house of cards?

Thanks for the reply, SwordGuy. I'm happy to give as much detail as necessary - I was trying to present my situation concisely.

I'm working as a software engineer in London earning 35,000 before tax. I am expected to get a raise to 40,000 in 2017. I have a 27,000 student loan of which I have to pay about 100 each month. My net monthly income is just 100 right now - I made the mistake of renting an expensive apartment. I'm going to use the break clause to move into a cheaper one in April, aiming to cut 400 from my monthly expenses. Meanwhile, I'm not doing well with the property I'm letting. It's a studio apartment - it's current monthly rent is 550, barely covering the 520 mortgage and making a loss after tax and service charges to the freeholder. At the end of the current tenancy, I will bump up the rent.

All the above considered, I could bring my net monthly income up to 800-900. To be frank, I'm not sure what I'd do with that extra money besides paying off my mortgage faster and building up a contingency fund.

Now to answer your questions. I'm well qualified, so could get another 35,000 software job within a couple of months. If I became seriously ill and lost my main income source for several months, I would have to move back in with my parents for a while. I would still be able to cover my mortgage.

Regarding big things breaking in my property, I admit I don't have a contingency fund for that right now. I tried to build a startup this year and ran out of money - I've only just cleared the debt to my family that helped me get back on my feet. Major things would be covered by buildings insurance. But something like the boiler needing to be replaced would be a tough hit, though I'm fortunate that my family could most likely cover that cost.

At this very moment, I am slightly vulnerable to all these things happening at once, but I am gradually building a contingency fund and looking to reduce my monthly outgoings to accelerate that.

I will be the first to admit that I've been very careless with my finances since graduating two years ago, but after learning the hard way, I'm starting to take my financial future very seriously and want to act carefully and strategically. Hence I'm here to request and listen to the wisdom of people who've done this before and know how to do it right.

waltworks

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Re: Sell the property or remortgage it?
« Reply #3 on: November 07, 2016, 08:22:40 PM »
Sounds like a horrible rental property. Sell it.

-W

Bracken_Joy

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Re: Sell the property or remortgage it?
« Reply #4 on: November 07, 2016, 10:01:32 PM »
You sound like you're on very bad footing here, with no emergency fund and owning a property and already cutting so close to the line.

I'll admit I haven't looked at forms of investment in the UK, but I'm sure there are FI building things you can do with your money besides real estate. Until you have firmer footing, real estate seems far too high risk with the margins you're looking at.

SwordGuy

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Re: Sell the property or remortgage it?
« Reply #5 on: November 07, 2016, 10:07:09 PM »
At 3.875% interest that student loan will take -- drum roll please -- over FIFTY YEARS to pay off at 100 a month.
If the interest rate is higher you'll likely die still owing money.
This website can be used to check out repayment options for loans that work like mortgages:  https://www.drcalculator.com/mortgage/

As for the studio apartment rental, it's a HORRIBLE rental property investment given the numbers you present.
550 rent for a 520 mortgage?   Every single day things are breaking in that apartment.   Things that you will have to pay for to fix.  Every.Single.Day.   

You need to subtract principal and interest in the mortgage, plus taxes, plus insurance, plus the property manager, plus set aside money for repairs, plus set aside money for vacancies (because you still have to pay the other stuff), plus moneys for utilities when the tenant is gone, plus any utilities you are responsible for, etc.

You are losing your shirt, you just don't know it yet.

I don't know what you can expect to increase the rent to.   But unless it's a hell of a raise in rent (like close to doubling it!), you're probably going to lose money.  It's just a matter of time.  The only reason to even consider keeping it is that the mortgage will be paid off in 5 years.   But all those other expenses will still be there so don't count on seeing much of that 550!    You still need to get the rent raised substantially.

The "1% rule" says you should be renting out the property for no less than 1,250, 1% of its cost while you still have a mortgage.  While the 1% rule is no substitute for actually running the detailed cost numbers, it's a quick rule of thumb.

By way of example, I live in a low cost of living area in the US.   I buy $35,000-$40,000 properties and fix them up.  After repair cost takes the total property cost up to $45,000 to $50,000.   I rent them out for $765 to $820 a month. 
That's a 1.6% to 1.7% rental rate.  2% would be a holy grail percentage.

You're running at 0.4%.   It's a money loser.

Until you learn how to find and purchase a property that will rent at least at 1% of the cost of the property, and preferably much better than that, you're going to be better off not buying.

That's my take on it.

Check out the book list in one of the sticky threads on the real estate section of the forum.  Lots of good books that will tell you how to go about it!  There are probably UK-oriented books that would cover similar info.


Jebby

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Re: Sell the property or remortgage it?
« Reply #6 on: November 13, 2016, 06:53:43 AM »
At 3.875% interest that student loan will take -- drum roll please -- over FIFTY YEARS to pay off at 100 a month.
If the interest rate is higher you'll likely die still owing money.
This website can be used to check out repayment options for loans that work like mortgages:  https://www.drcalculator.com/mortgage/

As for the studio apartment rental, it's a HORRIBLE rental property investment given the numbers you present.
550 rent for a 520 mortgage?   Every single day things are breaking in that apartment.   Things that you will have to pay for to fix.  Every.Single.Day.   

You need to subtract principal and interest in the mortgage, plus taxes, plus insurance, plus the property manager, plus set aside money for repairs, plus set aside money for vacancies (because you still have to pay the other stuff), plus moneys for utilities when the tenant is gone, plus any utilities you are responsible for, etc.

You are losing your shirt, you just don't know it yet.

I don't know what you can expect to increase the rent to.   But unless it's a hell of a raise in rent (like close to doubling it!), you're probably going to lose money.  It's just a matter of time.  The only reason to even consider keeping it is that the mortgage will be paid off in 5 years.   But all those other expenses will still be there so don't count on seeing much of that 550!    You still need to get the rent raised substantially.

The "1% rule" says you should be renting out the property for no less than 1,250, 1% of its cost while you still have a mortgage.  While the 1% rule is no substitute for actually running the detailed cost numbers, it's a quick rule of thumb.

By way of example, I live in a low cost of living area in the US.   I buy $35,000-$40,000 properties and fix them up.  After repair cost takes the total property cost up to $45,000 to $50,000.   I rent them out for $765 to $820 a month. 
That's a 1.6% to 1.7% rental rate.  2% would be a holy grail percentage.

You're running at 0.4%.   It's a money loser.

Until you learn how to find and purchase a property that will rent at least at 1% of the cost of the property, and preferably much better than that, you're going to be better off not buying.

That's my take on it.

Check out the book list in one of the sticky threads on the real estate section of the forum.  Lots of good books that will tell you how to go about it!  There are probably UK-oriented books that would cover similar info.

Thanks for the honest and insightful feedback! A few points/questions (in bold if TL;DR):
  • The student loan isn't too much of a concern. In the UK, you only have to pay it back when you're earning above a certain threshold (around 20k, I believe). If I was to suddenly lose my job, I wouldn't have to worry about paying this debt.
  • I purchased that property straight out of university - I viewed it through the lens of being a nice place to live that was close to my job rather than a solid investment. I started letting it when I moved to London from Cambridge (where it resides) purely for the purposes of paying off my mortgage while I rented elsewhere. My lens has changed now though - I'm starting to see it as an asset, albeit one that's currently losing me money.
  • The rental rate you suggest seems incredibly high. I did some research and similar properties in the area aren't going for any more than 650. A question for you: should I convert my capital repayment mortgage to interest-only? That would make it profitable, and I guess I could refinance it in the future after it's value has increased. Alternatively, I could probably remortgage it on to another fixed rate deal with a lower interest rate. Either way, I couldn't get the rent up to the 1% you suggest. Maybe the ratio of rent to property value is different in the UK. Either that or I paid way too much for this place.
  • As a property investor, is it preferable to rent a separate property or live in one of the properties in your portfolio? I know I'm a while away from this point, but I'm just curious.

havregryn

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Re: Sell the property or remortgage it?
« Reply #7 on: November 13, 2016, 08:41:21 AM »
The "1% rule" says you should be renting out the property for no less than 1,250, 1% of its cost while you still have a mortgage.  While the 1% rule is no substitute for actually running the detailed cost numbers, it's a quick rule of thumb.

By way of example, I live in a low cost of living area in the US.   I buy $35,000-$40,000 properties and fix them up.  After repair cost takes the total property cost up to $45,000 to $50,000.   I rent them out for $765 to $820 a month. 
That's a 1.6% to 1.7% rental rate.  2% would be a holy grail percentage.

You're running at 0.4%.   It's a money loser.

Until you learn how to find and purchase a property that will rent at least at 1% of the cost of the property, and preferably much better than that, you're going to be better off not buying.

That's my take on it.

This is so out of this world for Europe that I often wonder, upon seeing it mentioned often what it is that makes the market in the US so vastly different so that this can be an option. I am pretty sure that there is no chance in hell you would EVER find something that would hold up this rule in Europe.
A lot of countries here even have a legal limit where the maximum rent you are allowed to charge is 4% of the property value annually.  Buying something for 125 000 and then renting it out for 1250 does not exist here, it is borderline unthinkable. It really makes me wonder why that is so, if anyone has any insight, do share.


waltworks

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Re: Sell the property or remortgage it?
« Reply #8 on: November 13, 2016, 10:52:44 AM »
If you can't get 1% out of a rental property in your area... your area is not a good place to own a rental. Sorry.

There is no special rule that says you have to buy real estate in London (or anywhere else). OP has an awful rental. Period. He also has virtually no savings and shouldn't be buying any other properties.

-W

havregryn

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Re: Sell the property or remortgage it?
« Reply #9 on: November 13, 2016, 01:21:20 PM »
I always had the impression that you wouldn't really buy residential property in Europe as a passive income source but it's rather seen as a safe way to park money for those very risk averse (which is of course irrational in some ways but yet people believe it) or a very long term way of saving where you take a mortgage and have tenants pay it off, but you don't generally expect any kind of passive income from it unless you own it mortgage free (and that you usually get through inheritance). Here in Luxembourg I see ads selling apartments with existing tenants boasting 3.5% annual gross return on investment and that's supposed to be a good thing.