Sell house in negative equity or keep and rent it out?

[househunter0]

Hi all

I am looking for advice on whether we should look at selling our house which is in negative equity (subject to bank approval of course) or keep it and rent it out.

To give some background, last year we moved back to the area where I was born and grew up and we have been renting a house in the area since then. Our goal is to build on a site which my parents are gifting to us. The house on which we have the mortgage has been rented out since we left it. Our existing tenants are now moving out and we have the property advertised for 100euro a month more than we were getting as the rental market is strong in the area and we have received a lot of interest in the house.

My overall question is on whether we should keep the house for the moment and continue to rent it out in the hope prices will rise or whether we should cut our losses and look at selling the house now. The rent we currently receive for the property is not covering the mortgage - we are currently supplementing the rent received by about 500euro per month. In addition, we are paying 475euro per month rent for the house we are staying in.

Some details:

Income details
Net monthly Income self: 3k Private sector
Net monthly Income spouse: 2,400 public servant

Home loan lender: Ulster Bank
Amount outstanding: 229k
Value of home: circa 170k
Interest rate: Variable rate 4.75%
Monthly repayment 1200
Amount in arrears Not in arrears

Amount paid in rental: 475pm

I have a meeting set up with UB next week to discuss what our options may be in terms of selling or not selling. I am interested in hearing if a 'negative equity mortgage' may be an option for us. As we will be gifted the site, this would help to offset the negative equity.

I would appreciate any feedback that people have.

 

[trasneoir]

Either you've been under-charging in a big way, or the house is worth less than you think. From accounts here, typical annual rents tend to be between 5 and 7% of the property's value. That means your property should be fetching 700-1000 per month depending on the local market.

IMO you'd need 850 per month in rent before there's any case for (voluntarily) holding on to it, even for the medium term. If you can really only get 575 per month, I'd say cut your losses and get out from underneath it at quickly as possible.

 

[househunter0]

Hi trasneoir

Thank you for your reply. I should have been clearer - we are currently getting 650pm for renting out our house and have it advertised now for 750pm with a number of viewings lined up. We are paying 475pm on the house in which we are currently staying.

Interesting you say we'd need 850pm to consider keeping it. What calculations are you using to determine this?

Thanks

 

[trasneoir]

Interesting you say we'd need 850pm to consider keeping it. What calculations are you using to determine this?

(850 * 0.75) = €637 would gives an approximate gross margin on your rental (after all expenses and vacant periods)
(637 * 0.7) = €445 gives an approximate net margin after income tax (assuming you have an effective tax rate about 30%).

€445 is a little more than enough to cover the interest on the 170k value of the house, so your extra contributions are solely dedicated to building equity.(Over 30 years the interest on 170k@4.75% averages to €413/month.)

Note that I'm not including the 59k "upside-down" portion of the loan. That's a sunk cost and doesn't factor into the equation.

 

[trasneoir]

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