Accidental Landlords and Home Equity

Many modern day homeowners can be classed as accidental landlords when the property they bought to live in became their second residential ownership, perhaps because of a move for work or a move in with their partner etc. When the time comes that there has to be a move, and the finances are such that the first house is able to be let out to create an income the owners usually find themselves in a good cash flow position and with potential capital growth due to the home equity they have built up over the previous years. The opposite could also be true, they may have tried to find a buyer without success or the property is in negative equity, whereby they owe more than the value of what they own. When this is turned into a successful rental property which is covering its outgoings the owner can breathe a sigh of relief and use the income generated either to pay down the loan, creating more equity, to supplement their income or to put forward towards buying more property. Accidental landlords have a duty to inform their mortgage brokers that they have moved which usually means their interest rate on the mortgage will be altered as residential mortgages are usually cheaper than buy to let mortgages.

For new landlords using the home equity they have built up can be the best way of making tax free money, finding the deposit for another property or having a reserve to fall back on when times are hard. Even in these stringently controlled times having home equity is seen as a real bonus when applying for a mortgage, particularly with the same company as most lenders now want more security as they perceive the risks much higher.Accidental landlords are really in a privileged position as they are forced into making money by their circumstances. Few people realise the real potential of the current market with property prices at all-time lows, interest rates at the lowest level for the longest period ever known and rents at a new high. Even less see the possible dangers of renting to the wrong people. You are taking a huge risk if you don’t fully evaluate your prospective tenants in this market. Even using the deposit scheme doesn’t cover the cost of a tenant who wilfully wants to cause havoc and those that on the surface can seem very nice may have hidden debts and spiralling antisocial practices. A deposit won’t cover the cost of a whole new kitchen and appliances, heating system and all the doors, which we recently heard of being taken from a property by a seemingly very nice single mother.

The problem of being an accidental landlord is that you’re thrown in at the deep end and if you think you can leave it all to letting agents you could have a serious awakening. Whilst there are agents who can and do do everything they say, they really are in the minority. To this end, if you do need to have an agent, perhaps because of time constraints or distance from the property,then you need to work from recommendations of who to use and check up on the agents regularly. The more home equity you can build in your second home the better for when you sell again. Some accidental landlords use the excess income from the rental property to pay down the mortgage on their new property. This can be a sensible way forward as the interest you pay in the early days of a repayment mortgage can be reduced significantly. It can also have the adverse effect of seeming that little progress is being made overall in your financial plan or wealth building but solid foundations lead to greater strength which can also mean more resistance when times are hard.

Many people are finding times hard right now; the number of over sixty year olds going bankrupt is higher than ever before and still climbing. However, few people seem to realise that now is one of the best times in history for anyone to make serious wealth too. The opportunities in property abound far greater than most people understand which is why we always suggest a consultation with an expert experienced in the strategy you wish to follow. Whether you are an accidental landlord who has seen the value of more property ownership or somebody who has built up home equity and wants to use that resource to make a better life, always consider the pros and cons and of every deal along with the ethics of who you deal with before deciding to hand over any money. Once again this week we are chasing an unscrupulous property dealer to refund money paid without security to a prospective client. However you come into being a property investor, make sure you are in it for the long term by working with the right people.

Always find a team to work with that you can trust long term.

Written by:
Lionel Palatine – He is a regular networker and a speaker at events as well as being a property author and adviser. He joint ventures deals and shows people how to buy property for low cost which are inclusive of all fees and deposits.

You can find him on regular social media Twitter |  Facebook  |    |  YouTube  don’t forget to add him

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