Property TV | Property Question Time – Ep 142 – Existing Property Options when Moving Elsewhere
Lucia France: Okay. “My girlfriend and I would like to move in to a shared property. We both own properties that would perform well on the rental market, but it is unfeasible to live in either property together. My property, A, is worth 215,000 with 60,000 remaining on the mortgage, and I have 35,000 in savings. Hers, property B, is worth 160,000 with 119 remaining, and no savings. Potential rental income is 850 per month for mine, and 750 for hers. The property we want to purchase is £300,000, and our joint income is £78,000 with middle-of-the-road living costs. Would we be better off selling both, or keeping both as a buy-to-let, or keeping one as a buy-to-let? The prospective … ” Bear with me. “The prospective method we had in mind was to release equity in property A, e.g. 40,000 for mortgage of 100,000, and to sell B and combine my savings, equity release from A, and 40,000 from the sale of B for the deposit on the mortgage of our prospective purchase.” Advice please.
Paul Mahoney: Right.
Lucia France: If you can remember that far.
Paul Mahoney: Yeah, okay. So, essentially, just looking at what they should do with their two existing properties so that they can get a home together.
Lucia France: Exactly.
Paul Mahoney: That makes sense for them. Yeah, okay. Well, as we’ve said on previous shows, I would generally start with the default of trying not to sell properties, especially given that they’ve said that those two properties will rent quite well in the current market. If those properties rent well, they obviously work as an investment, so if they can keep them, that’s probably the ideal scenario. ‘Cause as we’ve said before, selling property is expensive, you’re going to pay capital gains tax. And then by putting that equity into your home, it might mean that your mortgage repayments will be slightly less, but it’s not really doing anything for you.
Lucia France: Right, okay.
Paul Mahoney: So, keeping them, I say … I would say, if possible, would be ideal.
Of course, they could remortgage them, to release the equity, which is the option that they mentioned. But as far as … That would depend on whether that’s going to release enough to allow them to buy. They say they have a £300,000 property, they’ve got £35,000 in savings, and they could probably release 40,000 from property A, so that brings them to a £75,000 deposit, which I would generally say would be enough to buy a £300,000 property. The only reason they would, therefore, sell property B, is if they wanted a lower mortgage. Or if they couldn’t afford the higher mortgage, I would say.
But again, as we’ve discussed previously, keeping those investments that are going to give them some income, and hopefully grow in value, as well, whilst potentially having a slightly higher home mortgage and potentially having slightly higher cost, so long as the returns from the two investments outweigh that cost, ’cause general … Hopefully they would be achieving a net yield from those two buy-to-lets, that, ideally, and generally what … Something I would aim for, is to have buy-to-lets that more than pay for themselves. So they could probably find themselves in a better cash flow position by keeping them. Even though their mortgage repayments on their new home might be slightly higher.
Lucia France: So … But they’d still have those other properties?
Paul Mahoney: [crosstalk 00:16:47].
Lucia France: I suppose you’re talking in terms of a more … More of a long-term approach for them?
Paul Mahoney: Well, yeah. Let’s say, for example, they have to pay an extra £100 a month for having a slightly higher home mortgage on their new property, but their two buy-to-lets are giving them £200 a month of net cash flow. They’re £100 better off for having … Solely from a cash flow perspective. But given that those properties will be leveraged, generally where you’re going to make your money there is in the growth of the properties.
They didn’t mention about whether it’s a growth area, but they said it would rent well, that’s great. Hopefully it will grow in value, also, and that will put them in a much better financial position than just having less of a mortgage on their home.
Lucia France: Definitely. Okay. And they said here that it’s not feasible to live in either property together. I guess if it was, that would make more sense, to just both move in to one, wouldn’t it?
Paul Mahoney: Potentially. If they’re both one bedroom flats, and they’re planning to have kids, that probably doesn’t work.
Lucia France: No.
Paul Mahoney: I don’t think it’s necessarily a bad thing to keep properties that you’ve bought as a home initially, just so long as they make sense as an investment, because the two criteria for buying a home versus buying an investment tend to be quite different. And generally, we … Quite often, I get questions around, “I wanna buy this place as a buy-to-let and move in to it in 10 years’ time.” It’s very hard to mold those two things. So, so long as they actually work as an investment, given they bought them as a home, then I’d say try to keep them, if you can.
Lucia France: Great. Thank you very much, Paul.