You don’t have to sell your home when you move
Rent-to-buy is a real choice for those seeking to move home. It could be that you’re retiring and downsizing. You may have a new job in a different part of the country. Perhaps you’re moving abroad.
Traditionally, if you were moving home, you would sell the one you’ve got and buy another. However, it may prove more valuable to retain your current property and rent it out while buying another home in which to live. Indeed, many have started profitable property portfolios using this strategy.
In this article, we’ll examine how you can decide whether it would be a sound financial decision to rent your current home rather than sell it. You’ll also learn about the other factors you’ll need to consider before making your decision.
Will renting out your home prove profitable?
The profitability of a rent-to-buy strategy should be measured regarding rental income and capital growth. It’s important to consider whether your property becomes cash flow positive or cash flow negative.
· Cash flow negative position
If it is cash flow negative, you’ll be relying on it to provide capital growth. For example, let’s say your costs (mortgage, maintenance, property management, etc.) are £100 more than your rental income. You’ll need to subsidise your cash flow position by £1,200 per year. Will this be worth it?
Examine the property price trends for the area where your property is located. Let’s say your property is currently valued at £200,000. If you expect house prices to rise by 5% per year for the foreseeable future, it will be worth around £231,000 in three years. Effectively, you will have invested £3,600 to gain £31,000. That’s an incredible rate of return, and example of how negative cash flow could make you a wealthy property investor.
· Cash flow positive position
If your rental income is more than the costs of holding and managing your old home as an investment property, then you’ll have positive cash flow. This could be a valuable income stream. In addition to this extra income, you will also benefit from any capital growth.
If your cash flow position is positive, you’ll be earning extra income that could subsidise the purchase of your new home.
The growth of value on your ‘new’ investment property could provide the equity to purchase a second investment property – and benefit from the awesome income tax advantage of remortgaging.
Before you decide your strategy, what factors should you consider?
Clearly, if you can afford to do so, there could be some very positive financial benefits of renting out your ex-home. However, before you rush to find tenants, here are the main factors to consider:
· Capital gains tax
Currently, you pay no capital gains tax on the sale of your main residence. You do pay capital gains tax on the sale of an investment property. However, the rules state that you get full relief for:
- The years you lived in your home
- Last 18 months you owned it, even if you weren’t living there at the time
The capital gains tax you owe is calculated as a percentage of the gain. Let’s say you bought your property for £100,000 and lived in it for six years. You then let it out for four years, at which time you sold it for £200,000.
You receive 7.5 years’ relief – or 75% of the gain free from capital gains tax. So you will only pay capital gains tax on £25,000.
· Income tax on rental income
You will pay tax on your rental income. The amount you pay depends on:
- How much you earn in rent after expenses
- The effect of mortgage interest tax relief
- Your individual tax rate
It’s best to take specific tax advice on this, as the mortgage interest tax relief rules are changing.
· Can you afford the deposit on your new home?
It may be that you must sell your current home to buy a new home. For many, this is the only way that a deposit can be found. However, there may be a way to release equity, buy a new home, and rent out your current home.
The best policy here is to use a mortgage broker with specific buy-to-let experience. It’s likely that your current mortgage will need to be converted to a buy-to-let. An experienced broker will have dealt with this type of situation many times. They’ll talk you through all your options, explain the rules and regulations that affect you, and find the best solution for your objectives.
· Void periods
There will be periods when your property is not tenanted. During these periods, you will still have to make the mortgage payments and pay council tax and utilities. Do you have the cash reserve to pay for any void periods?
To keep void periods to a minimum, you’ll need to employ a strategy to get the best tenants, and then keep tenants for longer.
· Distance, maintenance, time and stress
If you’re moving away, you should consider whether it will be viable to rent out your property. Being a DIY landlord can be stressful at the best of times. Distance makes the process harder. You’re responsible for advertising for and finding tenants, vetting them, collecting rent, and all the maintenance and repairs.
Even for those who live around the corner from their investment property, the time and stress of managing it are too much for many.
You probably don’t want the stress of day-to-day investment property management. But the extra income stream and capital gain that your current home could provide is more than appealing. You can have your cake and eat it. Contact Ezytrac today on +44 1522 503 717, and discover how our investment property management service could help you benefit from renting out your current home rather than selling it when you move.