Buy to Let – still an option?
Recent taxation decisions announced by the Chancellor do not seem to be putting some people off as I am still being asked about Buy to Let, (BTL), as an investment strategy. I have an issue with Buy-to-Let as running a small property empire is not a sinecure and has not been for some time.
An article in the Telegraph on Saturday asks why are landlords being demonised, as they provide a valuable service to the wider community, (http://www.telegraph.co.uk/finance/personalfinance/investing/buy-to-let/11991806/Rented-homes-are-desperately-needed-so-why-are-landlords-demonised.html). According to the article, 9 out of 10 landlords are individuals rather than companies and three-quarters of those own only one property, so not exactly corporate fat-cat country.
Most prospective landlords seem to believe that BTL will give them a passive income, which will be the case if they use a property manager for all day to day issues, but these people will routinely ask for 5-10% of the rental income and often fail to deliver. Being a landlord is no longer just finding a tenant and banking the money; there are some significant legal requirements and some major pitfalls to avoid.
Any new investor needs to stand aside from the lure of property and concentrate on what they are trying to achieve. Conventional investment, using unit trusts and ISAs is likely to outperform BTL in terms of flexibility, potential returns, the possibility of catastrophic losses and simplicity. For anyone still determined to go to BTL, please have a look at the www.property118.com and especially the forum to see what can go wrong.
The biggest pitfall for so many new landlords is having the wrong property or having paid too much for the right one. As a general rule, houses you would like to live in are a poor prospect for rental income; the best returns are at the bottom of the market, (or the very top!), rather than generous suburban villas or substantial country properties.
Spending a few minutes on one of the property websites provides some good ammunition for this argument, in this case, www.mouseprice.com. Picking some properties in Melton Mowbray, I find a 4 bed detached house with a drive-by valuation of £353,900 and an estimated rental of £970 per calendar month and a 3 bed terrace with a valuation of £117,300 and an estimated rental of £500 per month. This would give a gross yield on the first property of 3.29% and on the second of 5.12%. Assuming you had or could get £350,000+, you would be considerably better off with two terraced properties, as the gross yield would be higher AND you would have some diversification.
If I am doing calculations for clients, I would shy away from deals which do not have a gross yield of 7% or more, as I would suggest there is better value with conventional investments. For Melton Mowbray, where the rents are comparatively low, the price of a suitable property would need to be below £85,700 to attract my interest and match my financial requirements.
There is money to be made with BTL, especially if you do not need to borrow to finance the transaction. No need to finance and you will not be affected by the proposed change in the treatment of rental property finance interest. Using a corporate structure and commercial finance will also avoid the tax change, but you will still need to deal with inventories, deposit protection schemes, gas safety certificates, energy certificates, bad payers and void periods!
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If anyone is looking for general advice, then please write in to the blog and I would be happy to help with anonymous advice posted here. Alternatively, please call us on 0116 253 5600 and ask to speak to an IFA, (Independent Financial Adviser), for a no-obligation discussion.
If you know you need formal advice, have a look at http://bankfield.net/personal/savings-investment/, or ask around for a recommendation, it might even be me.