Its a worrying trend to see so many tenants losing their homes, due to a record number of residential landlords selling their properties.
Many of these properties are then being purchased by second home owners, or FHL investors (Furnished Holiday Lets – AKA Airbnb).
Is it wise to sell a residential rental property?
Aside from how awful this is for these tenants, I also question whether this is a wise long-term decision for the landlord too.
That said, I totally understand the motivation. Residential landlords have been squeezed hard by the tax man over the past few years. Their investment isn’t as tax efficient as it once was. In addition, there’s been wave after wave of new legislation and it’s certainly not a risk-free investment option.
Its therefore no surprise why many long-term landlords have become disillusioned with this sector. Especially considering the eye watering house price increases seen in West Cornwall over the past year.
But once sold, what happens with the profit Residential landlords make from selling their properties?
How can you protect your investment and still achieve the same return on investment?
Obviously, everyone’s circumstances are different. So for simplicity, I’m working on the assumption you’re a 65-year-old landlord, you could make around £200,000 net profit from the sale and that your property its currently giving you around £9k salary p.a. How can you be sure to match that income and keep up with inflation each year?
Option 1 – Live off the profit
You decide to put the £200,000 in the bank and draw a ‘salary’ of £9k p.a. This is still the safest place for your money. However, its not a good place to put it, if you want to grow your investment pot. You’d also have to have to increase your ‘salary’ in line with inflation each year, just to maintain the same standard of living.
So based on the UK inflation average of 2.5%, after 10 years you’d have drawn over £89k from your pot. This would leave you with just over half your profit remaining. It’s, therefore, not hard to see how quickly you could run out of funds.
Option 2 – Investing in the stock market
This can give you a healthy return on investment, with historic returns on average of above 5% p.a. This means you could potentially continue to draw an annual salary of around £9k, whilst leaving the bulk of your original investment intact. Although again, if you want to maintain your same standard of living, you’ll have the same issue as you would have had with putting your money in the bank, in that you’ll need to increase the amount you take as a salary each year in line with inflation. This could erode your investment pot, leaving you with a shortfall in future years.
If you decide on this option, you need to remember that investing in the stock market is one of the highest risk investment options and that your investment pot can just as easily go down as well as up. So it’s not something to jump into without doing your due diligence and speaking with experts in this field.
Option 3 – Investing in an annuity
200,000 would potentially give you around £7,500 p.a. So slightly less than the other two options but a lower risk and normally guaranteed for life. However, if you want to index link your annuity, your salary will drop to around £4k p.a. With an annuity, you also need to remember that your money would be locked in. You’d have no access or control over your investment, once you’ve purchased your annuity.
How does keeping your residential rental property stack up against all these other options?
If you decide not to sell your property, firstly you’d continue to receive your monthly ‘salary’ worth £9k per annum. You could also future proof your investment by increasing your rent annually in line with inflation. Secondly, property prices rarely decrease in value. This past year has been an exception, at over 13% but even a conservative year, the growth is around 5%.
Based on this very conservative growth projection your house value would have increased to around £370k in 15 years. In addition, you’d have received income of at least £135k in that time. Giving you a total profit of more than £300k. As you can see that, on paper at least, being a residential landlord still provides an excellent return on investment.
For simplicity, I’ve stripped out all the ifs buts and maybes but there’s still a lot to consider. You shouldn’t be lured by a quick profit now, only to regret it a few years down the line.
So, If you’re a long term landlord and are thinking of cashing in, please think long and hard before you do. Also remember to get property tax and wealth planning advice. For some it will still be the best option, but not for all. Once you’re out of the property market, with the way house prices rise, it will be hard if not impossible to get back in later should you wish.
If you’re worried about all the legislation, please contact us. We can help you to navigate it all. That said, if you do decide to continue to manage your property independently, then you should consider joining the CRLA (Cornwall Residential Landlords Association). This will help you keep your property compliant and your tenants safe.
I’d also love to hear why you think so many residential landlords are leaving this sector. Are you a residential landlord who’s considering selling your property? If so, what’s you reason? If you’re considering turning a residential rental property into an holiday let, then you might also want to read the article I wrote comparing the two. Here’s the link: Compare Residential with Holiday Let Incomes in Hayle
If you have an opinion, please either drop me an email or comment below.
I’m not an investment expert. my notes here and in all my blogs are just my observations (some might say ramblings!). So please don’t read this as advice. Before making any investment decision, please speak with an investment specialist.