Owning and Renting

[d24]

Times are hard and we just need a few peoples' perpectives on an idea we've come up with to ease the financial burden:

 

We have a house which is beautiful and we love it. It is 100% our forever home. but unfortunately due to a couple of pieces of bad news and the general economy slowing down, we can currently only just afford to pay the bills on our current income. First thing is that we do not want to sell this house, we love it.

 

The only thing we could think of was to rent it out to cover off the mortgage, and then rent somewhere cheaper for a year or so, and then take stock again at that point (see if it's more affordable).

 

UK income law states that we only have to pay tax on any 'profits' we make from renting - so we intend to rent it out on a 1 year deal to cover off exactly the cost of the mortgage (so someone will be getting a pretty decent deal). At the same time we'll move out and rent somewhere smaller for a year, somewhere obviously less expensive than our current place, and the difference between the two will go towards us regaining some quality of life. I'm not kidding when I say we literally had no money after paying mortggae and all the bills of this very large family home. Our hopes are that accross the board we'll save money for everything from heating, electric, rent, council tax, etc etc....

 

We've thought it through and come up with a few pitfalls (naturally), but I'd just like to hear the opinions of some other people please? Is there anything major we'd need to consider other than the usual worries when renting out your property?

 

Thank you!

[Edmund Exley]

Are you sure the market for the rent is high enough to cover your costs, meaning not just mortgage but also insurance, taxes, unforeseen maitenance etc?

[EssexMan]

What Edmund says.

 

Also bear in mind that you may need your mortgage lender's permission (although, to be honest, if you don't tell them the chances of them finding out would be rather slim, unless things go wrong).

 

And, unless you have a tenant in mind, consider the cost of the property sitting vacant. Even if it's unoccupied for just one month of the year, that means you have to find the mortgage somewhere for that month.

 

This also has an impact on how you price it. Say, for the sake of argument, your mortgage is £1000 monthly and you are therefore planning to rent it out for £1000 a month, but that's on the steep side locally so it will take you a month to find a tenant. You would actually be better off reducing the rent to £925 if that gave you a full 12 months' occupancy. It's surprising the difference a short period of no occupancy can make!

 

Finally, also consider whether or not to use a letting agent. It's a lot less hassle but obviously you will see less of the money.

[craigslist]

That's true, with a slowing economy, it will be hard to find trustworthy lessees, not even to mention a rental price agreed upon by such a lessee that will be enough to cover your mortgage. You guys need to be sure. The first rule of getting more money is to make more money. It is sometimes worth it to take on consulting jobs, extra shifts etc to increase your income. I truly hope you guys do not decide to sell, that will not be a wise decision in the long term. Can you not rent out a room or make a guest house out of it? Explore all the options first. Increase your income, lessen your expenses, keep your current and non-current assets if you only have one home, and find a way to make it work. Its a hard financial time for many people, do not make any rash decisions which might make the short term financial gains viable.

[becomingkate]

I think the best way to go about it is to rent out the top/main floor and you and your other half live in the basement. We had a tough time in Alberta from about 2007-2010 and a lot of people starting doing this!

 

Another thing you can do is either rent out a room or develop a mother-in-law suite. A room would bring about $500 a month and a suite would bring $900.

 

Moving out wouldn't help much unless you could live almost free somehwere else, like with parents or family, and staying in the house allows you to moniter the tenants so that there is minimal damage.

[d24]

thanks for all the responses guys:

 

the numbers side of it - I don't mind mentioning: our mortgage (with repayments) is currently ~£900 a month, and the house could rent for just over that (valuation from a letting agent and local knowledge). so even if we used an agent I'm fairly confident we'd see ~£900 to get the rent paying for the mortgage (and not making profit, so not having to pay tax on it). probably will end up using a letting agent, as long as we can find one that can market and let it out on a one year deal to someone appropriate who (at the end of the day) will leave us with enough $£ to pay off the mortgage.

 

the idea is to only move out when we have a tennant lined up (therefore no risk of losing out any front end rent) and to move back in after the 1 year lease is up (therefore not losing any back end rent). my wife made a point that could potentially the tennant not pay or move out or something (loopholes?) after 3 months, potentially screwing us -- I'm not sure about that (ideas?)

The idea is to take for 1yr a place say for £600 a month, saving us £300 per month just on mortgage/rent. On top of that our tennants will be paying for our houses's heating, council tax, and electric (which is quite high because it's a big property) and we'd be paying for those on our rented which would (should) be lower. So even if we just saved another £50 a month from bills, that adds onto the £300 to make a decent monthly saving. (again, am i missing anything there?)

 

With regards to making more money, i just don't see a market at the moment - I have been trying since September, and it's just not happening (hense this crazy idea). Plus i do acknowledge that there is the chance that we could get a bad tennant, but presumably (hopefully?) anything that went wrong could come out of a deposit right? Wife doesn't want to rent a room out as we have a little one (15months) so I understand her concerns with that (plus what lodger wants to be woken up at 3am if she's having a bad night lol). I was wondering what if this or that went wrong... I do have boiler insurance but if something happened to the white goods, how would I manage... not sure... and yeah i do need to look into landlords insurance, to see if it's affordable... but mortgage company are ok with the idea.

 

thanks for all your thoughts, there's a lot to think about there keep the ideas coming please, there's no such thing as a negative post, i really do want to consider all angles on this one

[EssexMan]

Are you sure the rental income is not taxable?

 

 

[lilypadgirl]

Not sure if I'm missing something or too naive, but why would you only want to rent at the mortgage if the place can rent for higher? Even if you pay taxes, you still get to keep the after-tax part of the profit, right?