Housing, pt 6: to sell or to rent?

Somewhat unexpectedly, I’ve bought a Dream Home.  I’ve managed to do this without selling my Former Dream Home.  My intention has been to sell the Former Dream Home shortly after moving, but a recent comment on my blog has had me considering my options.  Is selling really the right strategy or should I rent it out instead?

Thanks for sharing your 2016 goals. I don’t think that selling a house to pay out your mortgage will be good idea (in my point of view), better to rent the house and with that to pay the mortgage.

Happy new year

Sharon – Divorcedff

Thank you, @Divorcedff, for your suggestion.

My initial position was that I don’t fancy turning the Former Dream Home into a rental property, for three reasons:

  1. It would leave me too exposed to premium London property. I would have over half my net worth in London property, and that is too high for me
  2. Property is a hassle. I view property as very unscaleable, expensive, illiquid, frustrating and stressful to manage. Compared for instance to owning a Vanguard ETF.
  3. Rental yields are too low. I consider a 4% rental yield, pre costs, to be pretty good. For high priced London properties yields are generally lower. And this is before costs, which are significant and unpredictable. In fairness, a typical equity ETF would also have yields of perhaps 3%, but with no costs.

@DivorcedFF’s comment has me reconsidering each of these arguments, and adding some more.

  1. Sentiment. My Former Dream Home is somewhere I remain very attached to – in a way you (should) never become attached to a Vanguard ETF. I know and like the neighbours. I know the planning environment. It is close to the new Dream Home. These arguments help reduce the stress and frustration of managing a property, and would ensure I retained my stake in the asset and its community.
  2. London property. I am overpaying for the Dream Home, so I don’t anticipate any form of appreciable investment return. In effect I am happy to lock up this much capital in an underperforming use because it is where I will live and I believe it will make Mrs FvL and me very happy for many years – which is itself a much appreciated return. But the former Dream Home – what returns can I expect from that? Its neighbourhood won’t outperform. There is some planning uncertainty nearby which creates downside risk. The continued pressure on parking also creates downside risk. The political risks of higher stamp duty and maybe even mansion taxes are further downside risk. Overall I would be more confident of stock market returns over 10+ years than I would over the former Dream Home’s return over that period.
  3. Rental yields. I have just done some research on Zoopla. I think I could expect gross rental yields of about 3% return on equity. This is a bit higher than I had thought. Against that I would need to deduct letting fees, management costs and (very low) mortgage interest. Most of these costs are fully tax deductible, at least. But I think I would end up with a net yield of around 2%. This is roughly what I am paying for my margin loan, which leaves me no cushion. Whereas I think I can achieve 3.5% from an equity investment and, right now, FTSE doesn’t feel overvalued.

Overall, I think the right call is to sell the property. But it will depend on the price that I can get for it. And if I don’t see a fair price for it quite quickly then renting is certainly a viable alternative – and has some sentimental upside for me too.

3 thoughts on “Housing, pt 6: to sell or to rent?”

  1. I’d agree with your assessment.

    Other downside risk:
    – CGT is a pain
    – Concentration risk (voids, bad tenants, fire/flood etc)

    Plus it is a fair amount of aggravation.

    On the flip side you could probably boost your return by not using a letting agent

    Liked by 1 person

  2. Likewise I agree, huge political risks, very concentrated portfolio. We’ve just done a similar move to you, we kept the old place and let it out. But would not have done this if we’d known about the tax changes (re: mortgage interest at the time.) Housing is only a good investment with leverage.


  3. I’m a landlord with a substantial portfolio of properties in England rented to people on average wages which I’ve been doing for over a decade. If your equity in the old house was sitting in the bank, would you put it into a rental property? If not, why now? I used to enjoy being a landlord and recommended it to others – yes the gearing makes some more money, but with more debt, market & especially regulatory risk and the costs are growing (especially taxes, but also tighter regulations) and some rules are now so complex and badly written it’s almost impossible. eg my lawyer formally advised me not to take deposits any more as the law is so nightmarishly complex that one small slip-up with timing or the never-ending stream of paperwork and you would be unable to evict without paying it back to the tenant, which entirely defeats the purpose.

    The vast majority of letting agents are awful, which is why I run my own team. Even if you find a good agent (good luck) they will not get involved in getting good deals from tradespeople (they will probably get kickbacks at your expense), figuring out the cause of a housing defect, making decisions about repair & ongoing maintenance, picking up the mess after a bad tenant, or evicting one – you get to do all that yourself, or at the very least manage the range of people with the specific skills needed which is still a tedious job. It’s also unpredictable – an issue may crop up right at the worst time, or at Christmas etc – it’s totally out of your control.

    I started the long process two years ago of liquidating property assets and moving to Vanguard ETFs and I am already basking in the glorious sunshine of their simplicity (and lack of tenants, toilets & boilers).

    Good luck with the house buy & move, an impressive achievement!

    Liked by 1 person

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