First big investment decision – low risk or higher risk?

by Readers Question

11:05 AM, 31st July 2014
About 7 years ago

First big investment decision – low risk or higher risk?

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First big investment decision – low risk or higher risk?

I have a tricky property decision to make and would very much appreciate some advice. I have a central London flat, unencumbered by any mortgage, currently valued at £675,000. My husband and I currently have 1 salary of £50,000, and hope to have 2 salaries at about this level soon. We are looking to buy a family house somewhere slightly less central, at about £850,000. First big investment decision - low risk or higher risk?

We can do this 2 ways; 1) we sell the flat and buy, or 2) we move out of our flat into cheap rented accommodation, rent the flat at £2,700 pcm, and then get 2 mortgages, one on the London flat at 70%ltv, and another on the new house at about 50%ltv. With option 1) we would be leveraged at about 35% on one property. With option 2 we would be about 80% leveraged on the 2 properties, and so of course much more exposed to interest rate increases, but we would have the 2 properties. The flat is not a perfect BTL investment, but it is not bad, at about 4.2% yield. The major attraction of keeping the flat is the amount of investment going into the area at the moment, which is transforming the area and will mean a steep capital appreciation.

We could probably cover both mortgage payments with the rent from the flat, depending on what combination of interest only, repayment etc we went for (we have had several different offers). If we sold the flat, I doubt we would ever get back into the central London property market, but we would have much less personal debt and exposure, and could probably buy a bigger family house, too – which in turn, would appreciate in capital value faster than the flat.

I am concerned to make secure investments for the long term, as we hope to start a family soon. I think now is a good time of our lives to work hard and take on debt, in order to keep the London flat as a long term investment, and have our ‘eggs’ in 2 baskets rather than one. But my husband thinks we should take the less risky option of selling the flat to buy the house, taking on much less debt. He argues that that route could also leave us the chance to remortgage our house and buy a straight BTL investment elsewhere.

Thoughts please!

Many thanks in advance

Jemima

Comments

David Mensah

16:39 PM, 2nd August 2014
About 7 years ago

Good point Mark. My thought was that with central London flats you might have considerably less void. I just had my first void period in 10 years, 8 days in total, on what is probably close to 100 tenancies by now. But if for whatever reason they want to go back to one salary, then they are cutting it very close, especially if interest rates rise.

Puzzler

20:31 PM, 3rd August 2014
About 7 years ago

I think you need to look at your personal situation as well. You say the flat is yours and there is one salary - is that yours as well? why do you expect there to be two salaries soon as you have not yet started your family? who is contributing what? whatever you do if you're the major contributor, get this reflected in any contract of sale (or even a post-nup if possible).

Jeremy996

11:55 AM, 4th August 2014
About 7 years ago

This is a tricky one, and I would shy away from property when the margins are tight. If I am doing costings for myself or for clients, I am looking for a minimum return of 7.0% in terms of revenue and I would ignore completely any likely capital appreciation. As HMRC will not allow you to offset profits and losses across income sources,(except in very restricted circumstances), BTL revenue losses can sink you, even if the rest of your life is rosey.

Personally, I would see the risk of BTL property as on a par with equity investment, with the added complications of high transaction costs and high minimum investments. It is in my portfolio, but it is not all of it.

Si G

18:32 PM, 5th August 2014
About 7 years ago

Hello Jemima, had some thoughts if you take the riskier option i believe that you can sell the flat up to three years after you move out and still class it as your main residence therefore paying no cgt so if London keeps going at say 10% p/a thats an extra 67k a year tax free, downside is income from rent will be charged at higher tax rate, if you manage this yourself you can detract costs you incur but from my experience putting tenants into a flat worth this much is risky and you'll need to serve notice before you plan to sell it in order to sell within the time or move back in to keep classed as main residence, assuming it is sold vacant if and when it is sold, hope this helps.

Mark Alexander

18:52 PM, 5th August 2014
About 7 years ago

Reply to the comment left by "Simon " at "05/08/2014 - 18:32":

Hi Simon, the rules are no longer that simple and now only allow 18 months of PPR relief as opposed to three years. Please see >>> http://www.property118.com/capital-gains-tax-relief-on-a-property-you-have-lived-in/
.

Owner > buy to let - er?

11:25 AM, 7th August 2014
About 7 years ago

Thanks very much indeed for these thoughts. To answer queries - the flat is mine, the salary is my husbands'. A mortgage/btl/homeowners' loan would be based on the property and the salary.

My strong inclination to keep the flat, thereby taking the risker option comes from 1) my strong sense that its value (rental and capital) will hold or increase, irrespective of wider UK trends
..& 2) because i would like to use it to generate income, and release capital, allowing me to pursue my studies further.
....& 3) because in the future I would like to have access to it again for my own use.

To reduce the risk of being exposed to unaffordable interest rates I could A) buy the second property at much less than £850k, ie basically out of London (I have found one at £350k), and so be much less leveraged and B) make sure I get a decent salary.

So my latest plan is to do the above: rent the flat, borrow against it and buy out of London.

I appreciate the thoughts on cgt - Mark, you say things have changed, but your article you quote is very encouraging on the cgt front - is that position no longer the case?

On the CGT exposure, my current estimate is that if I sold in 5 years, I would have rented the flat for 65% of the time I had owned it, and would be liable for CGT of (say) 25% on 65% of any capital gain. If it had gone up by £100k, I would need to pay about £15k to HMRC, without counting any exemptions. If I then took it back as my primary residence,that would potentially reduce this liability further...?

thanks

Mark Alexander

15:13 PM, 7th August 2014
About 7 years ago

Reply to the comment left by "Owner > buy to let - er?" at "07/08/2014 - 11:25":

I will happily help you with an example calculation based on the new rules but I need to know when you purchased the flat and how much you paid for it.
.

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