Should I sell my house or rent it out?

coins stacked in front of a house

If it’s time to move into a new home, you may be wondering what to do with your current property. Many people sell their homes to be able to purchase another one, but if circumstances are right you may be faced with the choice of renting your old property out instead of selling up.

Not sure if renting out a home is right for you? We’ll guide you through the basics so you can decide whether you should keep your old home and become a landlord.

 In this guide:

Why would you choose to rent your home?

Owning two properties, and renting one of them out, can be a great source of additional income. This extra income is usually enough to cover monthly mortgage costs, and you might even have a bit of extra cash leftover too – all while gaining equity on the property.

If you own a great property, and believe that it’ll rise in value in future, holding on to it can be a fantastic investment – as long as you can afford it.

Renting out your existing house is also an option if you need to move away from your home temporarily, but do not wish to sell up. If you find yourself living elsewhere for work purposes for example, whether that’s for 6 months, a year or even slightly longer, but don’t want to say goodbye to your home, becoming a landlord can be a handy solution.

Can I rent out my home?

Even if renting out your current home is an attractive option, you’ll need to consider if it’s actually feasible first. Do you have enough money for two mortgages? And are you eligible to let your property out?

Does renting my home out make financial sense?

First and foremost, can you actually afford to keep the property and buy a new one at the same time? It’s important to take some time analysing how much owning two homes will cost you. You may wish to consult a financial expert to help you with this as there’s a lot to consider, from whether you have enough equity to get a second mortgage to stamp duty, capital gains tax and income tax.

Will I lose any benefits from renting my home out?

By earning rent, and capital growth on your property, you may no longer qualify for certain benefits. It’s something to consider, before diving in. For example, if renting out your home means you’ll earn £50,000 a year you will no longer qualify for child benefits.

Will my mortgage company let me rent out my property?

Even if renting out your home is possible financially, you’ll need to check if you’re able to do it with your existing mortgage. Make sure you check the small print of your mortgage. Some lenders won’t allow this, and you may need to change your mortgage. Others may place limitations on how long you can rent for, or charge you a fee instead.

If you discover your mortgage isn’t suitable, you might wish to consider a Let to Buy mortgage instead. What is essentially two mortgages, it has been designed for people who want to keep their existing home and rent it out, while buying another home for themselves.

The costs of letting a house

While you’ll earn money from your tenants, there are also many costs associated with renting out a home. As a new landlord, you’ll need to consider the following:

  • Mortgage payments
  • Property taxes
  • Landlord insurance
  • Advertising and tenancy checks
  • Accountancy fees
  • Property management fees
  • HOA Fees (Homeowners Associated Fees)
  • Mortgage Insurance premiums
  • Repairs
  • Ongoing maintenance costs

Income Tax

The money you make from your tenants will be added towards your income tax, which is a government tax everyone must pay annually. The income tax rates for the 2019/2020 tax year – starting from the 6th April 2019, are as follows:

 

BandTaxable IncomeTax Rate
Personal AllowanceUp to £11,8500%
Basic rate£11,851 to £46,35020%
Higher rate£46,351 to £150,00040%
Additional rateover £150,00045%

 

Source: Gov.UK

The first £1,000 you earn from renting out your property will be exempt from tax. Certain expenses associated with renting out a property are also exempt, meaning you can lower your income tax bill be claiming back for:

  • Landlord insurance
  • Costs of services (such as paying the wages of gardeners and cleaners)
  • Letting agents’ fees
  • Legal fees of a year or less
  • Accountant’s fees
  • Ground rent and service charges
  • Tax relief on replacing (not for buying new) ‘domestic items’ such as beds, carpets, curtains, fridges, washing machines, sofas etc.

The costs of selling

Of course, there are also costs associated with selling your home. Depending on the method you use to sell your home, costs will vary. For example, if you sell via a property auction there’ll be entry fees and commission fees to pay. However, if you sell via a reputable quick house sale buyer like Good Move, legal costs and any other costs associated with the sale will be covered.

Arguably, the most common way for people to sell their home is through an estate agent. If you choose to do this, you’ll run into the following costs:

  • EPC
  • Early mortgage fees
  • Legal fees (e.g. a solicitor)
  • Commission
  • Home improvements
  • Advertising
  • Final bills

Read our guide on:  The cost of selling a house.

Selling vs Letting out: Pros and Cons

There are pros and cons to both renting and selling. The option that is best for you will really depend of your own personal preferences and circumstances, but to help you make a decision you can view the advantages and disadvantages below.

Pros of letting out a house

  • Renting out a home is a source of additional income.
  • You can secure capital growth by keeping your property and renting it out.
  • You can outsource landlord responsibilities to a trusted agent for a fee to free up your time. Make sure they are a member of the NALS, ARLA or UK ALA.
  • Tax deductions are available to landlords. You can expense things such as replacing furniture, painting, accounting processes and professional cleaning services.

Cons of letting out a house

  • Outsourcing landlord responsibilities to an agent can be costly – consider how much this will take from your overall profit.
  • If you choose to do everything yourself instead, being a landlord can be time consuming. There are over 400 rules and regulations to abide to as a landlord and fines can reach up to £30,000 for non-compliance.
  • You may need to invest money to bring the property up to renting standards before finding tenants.
  • There’s a risk of tenants causing damage or not paying rent.
  • There’s a risk of losing money on both homes if market falls.
  • There’s a risk of being unable to rent out the home.
  • Taxes on second homes can be high.

Pros of selling up

  • Only owning one property means you can spend more on your new home.
  • Selling a home releases equity that can be spent elsewhere.
  • Selling is less time-consuming as you only have one property to worry about!
  • You’ll face fewer unexpected costs, e.g. damage caused by tenants.

Cons of selling up

  • You’ll be selling an asset that may grow substantially in value.
  • If your home has negative equity, you might have to pay it off and redeem the mortgage.
  • No extra income as you won’t be letting your home out.
  • Selling may take time if you use an estate agent or auction, and can slow down the process of buying your new home.

How to become a landlord by renting out your home

If renting out your home is a viable option for you, you’ll need to prepare yourself for becoming a landlord and get your home ready for its new tenants. There’s a lot to do, so make sure you get the basics right by following our step-by-step guide below.

  1. Get in touch with your mortgage lender
    As we’ve mentioned, you’ll need to speak to your mortgage lender if you’d like to rent out your home. Your current mortgage may cover this, you may need to change your policy, or you may need to remortgage to have tenants in your property – it all depends on your individual policy.
  2. Invest in landlord insurance
    Once your mortgage is sorted, you should purchase landlord insurance. It’s not a legal requirement, but it’s highly recommended. It’s like an extended version of home and contents insurance, and as well as protecting the contents of your home, landlord insurance also usually includes buildings cover, protection against loss of rent, damage caused by tenants, theft, legal expenses if you have issues with your tenants and more.
  3. Prepare your property
    There are over 400 rules and regulations surrounding renting out a home. As well as making sure your property abides to them all, you’ll want to make sure it appeals to tenants aesthetically, and that you furnish the property if you’re not renting it out as unfurnished.
  4. Find an agent, or begin advertising privately
    Once your home is ready, you’ll need to find tenants to fill it. You can find an agent to help you do this, or advertise privately instead.
  5. Find the perfect tenant
    Once prospective tenants have viewed your property, you’ll be able to choose between applicants.
  6. Wait for reference and credit checks to be completed
    Found the tenants you’d like to live in your home? Great. If you’re using an agent, they’ll carry out references and credit checks for you. If not, it’s advisable to do this yourself before you finalise their move in date.
  7. Hand over the keys
    Checks all complete? Once all relevant paperwork has been signed, including a tenancy agreement, then you can begin to collect a deposit, rent and hand over the keys to your new tenants.

FAQs

Can I rent out my home with my existing mortgage?

You’ll need to check with your mortgage lender if you’re able to rent out your home. Each mortgage will be different.

Can I have two mortgages at the same time?

Yes, you can. As long as you can afford to pay both repayments, you will be able to take out a second mortgage.

What is equity?

Equity is the portion of your home that you actually own. It is calculated by deducting what you’ve have left to pay asset (e.g. your home) from its true value.

Do I need landlord insurance?

Taking out landlord insurance isn’t a legal requirement, but it is highly recommended to protect your home from theft, damage and against issues with tenants.

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