It’s estimated that up to 30% of landlords are considered ‘accidental’ landlords, for example they end up letting their own home because they couldn’t sell it or don’t want to sell it.
Accidental landlords tend to let because they have to, rather than just to make money.
For some it has been a great decision, they have managed to make money and even build a buy to let portfolio off the back of letting their first home.
However for others it has not worked out at all.
Some have seen a home they once loved ruined through damage while others have not received rent for months at a time and ended up being owed thousands or tens of thousands of pounds.
So, as always with property, there are winners and losers.
Before you sell or rent your existing home and buy another, it is vital to take expert financial and tax advice to understand the pros & cons of each route.
Renting your home
- Potentially help you move home if you’re only moving away temporarily or can’t sell the property.
- The hassle of renting can be outsourced to a quality agent.
- A decent tenant will pay rent on time and take care of your property.
- You can make an income and secure capital growth from retaining the existing property and letting it.
- You may need to invest money ensuring the property meets the legal requirements e.g. fit a new fuse box or put in a new boiler.
- Tenants can cause damage to your home (even setting up cannabis farms), which may/may not be covered by your landlord insurance.
- Taking on additional debt may result in losing both homes if prices fall and/or you default on mortgages.
- Keeping up with new and the existing 400+ rules and regulations to let a home is difficult and if you don’t, you can be fined up to £30,000 for non-compliance.
- If the tenant stops paying the rent, you can lose income and end up having to pay out a lot of costs keeping the property going. This can also happen when the property doesn’t let (referred to as ‘void periods’).
- Renting a property can be expensive to maintain and can cost more than the rent you receive.
- Taxation on ‘second homes’ including buy to let can be much higher than investing money in other ways.
Selling your home
- You can spend more on your next home.
- Any additional money you spend on a new home means when you sell, the gain is free of Capital Gains Tax.
- It allows you to move on with your new life.
- It allows you to release equity to spend or reinvest in less risky investments.
- Less hassle: no unexpected repair bills, tenant damage or voids.
- Not putting all your eggs in ‘one basket’ relying on one property to deliver a return.
- You may be selling off a lucrative asset that grows substantially in value.
- If the property is in negative equity you may have to use spare cash to pay off and redeem the mortgage.
- The property may earn a good income and contribute to your pension in the future.
- It may take time to sell, putting off your ability to move to a new area/property.
- Emotionally it can be difficult to part with a family home.
When does renting your home make sense?
Before you assume it’s a good idea to let the property out, it is worth analysing the implications in the future, at least by 5 or even 10 years.
Here are the ten steps you need to take to make sure you understand the implications of selling versus renting from a financial perspective:
- Find out what the rental market is like for your existing home, not just now but in the future.
- Forecast what your existing home would be worth in the future – has it already benefited from huge capital growth over the last few years and these rises are now slowing or is there a reason for a potential big uplift, such as new transportation?
- Understand the true costs of renting a property, including what upgrades are required to let legally to tenants – These may cost several thousands of pounds.
- Work out if you can afford the new property you want and cover the costs of the existing property, especially if you haven’t any rent coming in.
- Ensure you understand the tax implications of earning rent and securing capital growth from the property. Will you lose any benefits such as child benefit if the rental income takes your earnings over £50,000?
- Compare the returns (net of tax) of renting a property versus investing the same amount of equity in other investments, such as financial instruments / markets.
- Check if your existing lender on your first home would allow you to retain the current mortgage terms (and rates), how long for and at what cost (if any).
- Understand the implications and how you can insure against the risks of letting. These include: voids, tenant damage, loss of rent, eviction costs, job loss and sickness, all of which can make it difficult to let and own a home at the same time.
- Find out if you need to be licensed or registered as a landlord (you do in Northern Ireland, Wales, Scotland) or if the property requires a license from the local authority to be let. Know the costs and how you will abide by and keep up with the national and local laws.
- Work out how long you intend to keep the rental property for and if you plan to buy more properties, check if your lender allows this and if they need a formal business plan.
Thinking of selling or renting your home?
If you want an idea of what your home might be worth to sell and what your home would achieve on the rental market, get in touch with the team on 0121 430 4448 or email firstname.lastname@example.org and we will be more than happy to provide you with whatever information you need.