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Currently I have a mortgage on my house, the mortgage is £2000.

I am moving to another city, but don't wish to sell my house, the rental value is £1500.

Does it make sense for me to 'cover' the £500?

The house is worth £600,000 and I have 20 years left on my mortgage.

In my mind, I'll have an asset worth £600,000 by only paying £500 a month (£120,000 = £500 * 12 months * 20 years).

But I'm not sure if that's a good way to look at it.

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    A country tag would be helpful. Is mortgage interest tax-advantaged in your country? Do you expect housing prices to increase in the near-term? Typically renting with negative cash flow is not advised, but there can be exceptions. – Hart CO Oct 22 '18 at 20:24
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    We don't really have enough information..... What's the price you could currently get if you sell ? How much money do you owe ? After you move do you rent or buy ? would the current equity help you pay less on the next home ? – xyious Oct 22 '18 at 20:44
  • In the US, you can't even begin to consider that question without looking hard at the tax implications. I often see numbers where the tax advantages make the rental viable. So the question is, how does that work in the UK? – Harper - Reinstate Monica Oct 23 '18 at 7:11
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    Note that if you let a property that you used to live in, you must get permission of your mortgage provider, as your current mortgage is unlikely to be valid for rental property. – Steve Melnikoff Oct 23 '18 at 8:16
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    Given you are paying £2k per month for your mortgage, it seems to me that it is possible that you are a higher-rate taxpayer (if not, this comment can be safely ignored). For a higher-rate tax payer, rental income is subject to at least 40% income tax. While mortgage interest is still deductable, the UK government is stepping down the relief available, meaning it will cost more in the near future. Something to bear in mind. – B.Liu Oct 23 '18 at 8:43
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TL;DR;
In a perfect world that would work out, but we aren't in a perfect world.


The main thing you are failing to consider in the question is risk.

Major repairs:
If you own the house, then you're stuck with the major repairs (heat/air, new roof, refreigerator, water heater, etc.) and you'll have a lot of those over the next 20 years.

Vacancy:
When you shift from one renter to the next you will generally have a month without rental income (meaning you'll cover the full 2,000).
You didn't share the location, but if you're where I live (and you aren't because you said "£") you have to repaint if the previous renter was in the house more than three years, you have to re-carpet if they were there for 5+ years.
Check to see what the laws are for the house's location. You'll have to fix anything that was broken.
You cannot keep the renter's security deposit for 'normal wear and tear'

Non-payment/eviction:
If you have to evict someone that's a 90-day process here... from the time the person is served.
So if they don't pay in November, but have a good excuse so you let them slide, they don't pay in December, then you evict in January, they can legally stay there through March. That's about six months of you paying 2,000/month instead of 500.

Other: There are a few weird/unlikely things that I cannot guess because I don't know the location.
An example in the US is that if the renter is recent military service or inactive reserve and called back to active duty the rent you are allowed to charge could be reduced and there's nothing you can do about it (including sell the house!).

If you're lucky, you won't have those problems.
But if you're that lucky, maybe sell the house and buy lottery tickets (humor intended)


If you provide more information, maybe someone could help you more.

Useful things you can share include:

  • length of the loan (20 years left... of 30?)
  • interest rate of loan
  • purchase price and appreciation (together should be 600,000)
  • property location
  • your disposable income (is 500/month +2000/year a big deal... or not?)
  • The question is now tagged as UK so: (1) there's no legal obligation to repaint or re-carpet every x years. (2) I'm not aware of any special rules for military personnel. Other than that, it sounds like the UK and US aren't so different... – Steve Melnikoff Oct 23 '18 at 8:15
  • Even if there aren't rules in the UK governing when you must repaint and carpet/refinish/etc. you still have normal wear and tear that you must account for in the proposed 20 years. Perhaps taking depreciation will overcome that, but I wouldn't think so because you also have to overcome the income tax which I assume is applicable (UK though so I don't know). – J. Chris Compton Oct 23 '18 at 9:13
  • Re repaint/carpets: absolutely; I just wanted to make the point that here, landlords can determine when to do this. – Steve Melnikoff Oct 23 '18 at 9:15
  • The military thing is (as stated) unlikely. But don't forget that because you aren't living in the area you wouldn't be able to do minor repairs yourself and would have to trust others to tell you if they are even needed, and trust them to get competitive bids, etc. LOTS of risk to my mind on break- even deal if you're a distant landlord. – J. Chris Compton Oct 23 '18 at 9:18
  • Indeed; I've addressed some of this in my answer below. – Steve Melnikoff Oct 23 '18 at 9:19
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I was in a similar situation: I moved several hundred miles, I found I would take a serious loss if I tried to sell the house, and so I decided to rent it out.

I discovered that there are large risks and additional expenses.

Anything that goes wrong in the house, you have to fix. As you won't be living in the area, you'll have to pay someone to fix it. There are many minor repairs that if you were living in the house, you might do yourself at minimal cost. But a renter isn't going to do that, so you have to pay a professional.

I had one time a tenant complained that the water heater wasn't working. I had to call a plumber. He discovered that the knob on the water heater was set to "low". He turned it up to "normal". Problem solved. Bill: $200. I don't really fault the plumber. He had to drive all the way to the house, see the problem, turn the knob, wait around to make sure that solved the problem, then drive back to his office. I had many such trivial problems that cost me significant money.

Are you confident you will have a renter 100% of the time? When someone moves out, it can take months to get another tenant.

And then there are bad tenants.

I had one tenant who did $10,000 in damage to the property. After they left, I found trash all over the house a foot deep. Everything from paper to rotting food. One bedroom had feces smeared on the walls. Almost every light fixture in the house was broken. I had to do major clean-up, re-carpet the entire house, and hosts of other repairs.

In my area, you can theoretically evict a tenant with 3 days notice. But in practice they just don't leave. So then you have to take them to court. The court will schedule a date a month or two away. Both times I evicted someone, they didn't show up for the hearing and the court promptly gave me a default judgement in my favor. Great. Now I have a piece of paper saying they have to leave. They still don't leave. So now I have to get the police to throw them out. That takes another month or two. In the time from when I tell them to move out to when the police actually throw them out, they are, of course, not going to pay the rent. Plus I had to pay a lawyer. They may be angry at you for ordering them out and deliberately vandalize the property. One evicted tenant stole appliances. Yes, I sued them and won. But they simply didn't pay and disappeared. Now what? I could hire private detectives to track them down, but that would cost more money with no guarantee of success.

My point is not that owning a rental property is always a bad idea. Obviously some people make a lot of money at it. My point is that it is not guaranteed free money. There are many expenses and many risks. If you want to get into the business of being a landlord, if you know how to manage properties or are prepared to learn, great, might be a good business. But to try to do it on the side while working some other full time job? I'd discourage that. Or at least caution you to investigate thoroughly and make sure you know what you're getting into.

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Does it make sense for me to 'cover' the £500?

If you can afford it, then possibly. However, it won't be £500 per month, because of the other things you need to pay for:

  • If you use a letting agent, their monthly fee (given you're moving to another city, a local agent would be a good idea).
  • Contingency fund, in case something needs to be fixed or replaced quickly, and to cover costs when the property is empty.
  • If your mortgage provider requires you to move to a buy-to-let mortgage, the interest rate may change (and note that you must seek permission to let from your mortgage provider, as otherwise you're likely to be in breach of your current mortgage).
    • On the other hand, you may be able to switch from a repayment residential mortgage to an interest-only buy-to-let mortgage, which would reduce your monthly payments - though obviously the amount of the loan that you owe would stop decreasing at that point.

So, if you can still afford all of this, then letting your property may be feasible. However, the only rationales for running at a loss are either because you intend to move back at some point, or because you expect the gain in the value of the property over time to exceed the loss you're making. If neither of things are true, it may not be worth doing.

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In my mind, I'll have an asset worth £600,000 by only paying £500 a month (£120,000 = £500 * 12 months * 20 years).

That doesn't add up. You're paying £480k (including the rent) but getting £600k. Presumably you're paying interest. So you owe less than £480k.

If you sell the house now, you'll have at least £120k left over. Perhaps you'll have £240k, as a quick sanity check with a mortgage calculator suggests £120k in interest is reasonable. If you invest £240k in a stock/bond mix, you could easily have £600k in twenty years. And then you don't have the risk that you'll go through a bad patch and be unable to keep up the £500 a month.

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From a pure Investment perspective:

Simple Example Calculation:
Investment: £600,000

Turnover 

Rent: 12 x £1,500 =   £18,000

Costs

Write-Off (50 years): £12,000
Repairs (1%):          £6.000
Rental-Service:          £300

Total Income -£300, ROI -0.05%

Now there are different ways to calculate this - do you expect a rise in value of the house? Do you have tax-advantages? Different opinion on repairs etc? What other costs do you have?

Also you have a pretty profound risk, because you are not very well diversified. If you fail to find a tenant for some months or they don´t pay their rent, you have an immediate problem.

So I´d say no, at that rate it does not make sense - you´re better off with some other form of investment - but feel free to run your own numbers an see if the outcome is different for you.

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