Housing, pt 6: to sell or to rent?Posted: 2016-01-01
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:
- 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
- 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.
- 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.
- 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.
- 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.
- 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.