If you plan to move house, you probably expect to sell your current property first. However, that may not always be the best financial decision. So, is it better to sell or rent out your central London home, and how do you decide?
When people ask us whether they should sell their house or rent it out, we would love to give them an immediate answer that sends them away satisfied they are doing the right thing. Unfortunately, there is no one size fits all solution. The response we end up giving them will depend on their circumstances.
Should I sell my house or rent it out?
When buying a new home, most people expect to sell their existing residence because they need to release the equity tied up in their current home to buy their next property.
However, there are several situations when renting out your home, rather than selling it, would make good sense:
- If you are moving away temporarily and plan to return to the property.
- If you are buying a property with your partner, renting out one and selling the other could provide you with enough capital to buy your new home and earn rental income from the other property.
- Your house isn't selling, but you need to move quickly.
- You can afford to buy your new home without selling your current property and want to become a landlord as a long-term investment and benefit from the rental income it generates.
What will happen to property prices?
Nobody can see into the future, but you can watch property prices and market trends to gain an understanding. Resources like the Zoopla House Price Index can give you insight into the property market and projections for the months ahead.
Timing is key. Successful investors increase their property portfolio at the right time and hold on to their existing investments in tougher times.
You should reflect on your personal circumstances and your plans for the future. For example, property prices typically rise in the long run. Landlords who plan on keeping their properties for many years often benefit from long-term capital growth despite a short-term dip.
What if there's a recession?
What happens to your property commitments if the UK falls into a recession? It's a serious consideration. Economists have predicted a recession, and the IMF forecasts that the UK economy could shrink in 2023.
Now is the time to take a hard look at your finances. Consider what would happen if you lost your job, for example. If you would struggle to pay multiple mortgages or cover unexpected costs, you may decide to sell your home.
Renting out your property
Things to consider when renting out your property
Renting out your property isn't as simple as just approaching a letting agent and asking them to find a tenant. Before you decide to rent, ask yourself:
- Can you afford your new home without selling your existing one?
- Is the rental market right for your home? Do properties like yours rent easily and to good tenants?
- What rent could you achieve, and will this cover all your costs?
- Have property prices been growing steadily in your area, and are they likely to continue to do so? The best rental properties provide both a steady rental income and capital growth in the long term.
- Will your mortgage lender allow you to rent your property? You will probably have to switch to a buy-to-let mortgage.
- Is it tax efficient to rent out your property? You will have to pay income tax on the profit you make from renting out your home. A tax accountant or financial advisor will be able to inform you of the tax implications.
Pros and cons of renting out your property
What are the pros and cons of renting out your central London house? Consider every angle before you come to a decision.
The pros of renting out your property
- You can make a steady income from renting out property.
- If you keep the property for an extended period, you stand to make a sizeable profit when you come to sell.
- If you're relocating, you can retain property in London.
- You can keep a property you have a personal attachment to, even if you can't or don't want to live in it yourself.
- The rent will cover your mortgage costs.
- You can provide a good home for tenants.
- In most cases, the tenants are responsible for paying utility bills and council tax.
- A good letting agent can make the rental process easier with expertise in the rules and regulations and can often provide management services.
The cons of renting out your property
- You may need to invest money in the property to prepare it for tenants and ensure you meet legal obligations.
- You need to keep up with new regulations for rental properties.
- You must pay ongoing maintenance costs if you rent your home.
- You're trusting the tenants to take care of your property.
- You must pay utility bills and council tax if the property is empty.
- You'll pay a stamp duty surcharge if you own more than one property.
- You may be liable for capital gains tax when you decide to sell. Find out more about capital gains tax in our blog.
Selling your property
Things to consider when selling your property
Selling your property is the simplest option, but it may be easier said than done. Failing to secure a sale at the right price could be why you are considering renting your home out.
Pros and cons of selling your property
Should you sell your house or rent it out? Here are some of the pros and cons of selling a property that you should consider.
The pros of selling your property
- You will have more to spend on your new home, allowing you to buy a more expensive property or put down a larger deposit and benefit from a better mortgage deal.
- If you sell your house and the property is your primary residence, you won't have to pay capital gains tax.
- Selling your home can be less hassle, as you won't have to deal with tenants and repairs.
- You don't have to worry about repair bills or making your mortgage payments if your tenants are late with their rent or the property is empty.
- You could make money if you sell your home at the right time.
- A good estate agent can help you with the process if you decide to sell your property in London.
The cons of selling your property
- You could be missing out on a potentially good source of income, particularly if your property is in an up-and-coming or sought-after area.
- The capital gains could contribute to your pension.
- It may take time to sell.
- You will need to account for estate agent fees and any expenses of preparing your home for sale.
- You could lose money by selling your home before house prices rise and potentially miss out on long-term capital growth.
Frequently asked questions
These are some of the most frequently asked questions about renting out your London home. If you don't find the answer you're looking for, contact our experienced team to discuss your situation.
What kind of profit can you expect if you rent out your house in central London?
Use your estimated investment, running costs and monthly rental income to work out what profit you could make if you start renting out your London home. Find out how to calculate your net rental yield with the net rental yield formula here.
Should you use an agent to rent out your house?
A good agent can guide you through the rental process and advise on current landlord regulations. They know how to market your property and are familiar with documentation and requirements such as Right to Rent checks. Letting agents can also offer management services to take day-to-day concerns off your mind.
What are the tax implications of renting out your house?
You will need to pay income tax on your property's monthly rent, and there can be further tax implications when you start renting out your home. For example, the additional income may take you into a higher income tax bracket or affect your entitlement to Universal Credit or Child Tax Credit.
Rental properties are classed as assets, so you could be liable for capital gains tax if you sell further down the line. However, you may still be able to claim Private Residence Relief for any periods where the property was your primary home. There are also tax deductions, such as property allowance.
Seek expert advice to discuss all the tax implications in detail.
How can I finance two properties?
Think carefully about your finances and how you will finance two properties simultaneously. If you decide to rent your home, you must speak to your mortgage lender. Some agreements allow you to let out your property on a normal residential mortgage if you relocate temporarily, intending to return. Otherwise, buy-to-let and let-to-buy mortgages are two options you may consider.
Taking out a mortgage for a property you intend to rent out is known as a buy-to-let mortgage. They usually come with higher interest rates and are typically interest-only agreements.
Another way to finance two properties is by taking out a let-to-buy mortgage. If you're planning to rent out your house, let-to-buy mortgages allow you access to the equity you hold in the property. You can use that equity to remortgage and put down a deposit on a new home.
As with any house purchase, you must demonstrate that your income can cover your mortgage payments. You will also be responsible for covering repayments when the property is empty. Seek specialist mortgage advice to determine what you can afford, and discuss the pros and cons in detail.
How do I rent out my home?
Once you've made arrangements with your mortgage lender, you will need landlord insurance and a letting agent. Landlords must follow strict guidelines for rental properties in England, so you may need to take on some preparatory work before you seek prospective tenants. Your house may require upgrades to meet current standards for a rental property, and you will need to arrange gas and electrical checks.
Once you find tenants, you will need to follow the rules on Right to Rent checks, government-approved tenancy deposit schemes and accessing the property. You will need to carry out an inventory and be prepared for maintenance requests during the tenancy. These are services that your letting agent may be able to provide support for.
Need more help?
If you are unsure whether to sell or rent your property, contact us here at Plaza Estates. We have years of experience in the central London property market and will be able to advise you on the best course to take regarding your property.