Buy to Let - the Ultimate Investment by Rajesh Modha
Are you tempted to join the 1,400,000 other investors into property investment? Follow the rainbow to the promised pot of gold? Is the buy to let really that easy? The ultimate investment?
Recent research from ‘Landbay’ (a buy to let lender) suggested that the return from buy to let to the end of 2014 would have provided a return of £14,897 if £1,000 had been invested in 1996 (through a buy to let mortgage at 75%). Additional research suggests that there will be an increase in the amount of long term tenants and it is predicted that total home ownership will continue to fall.
This suggests increased demand for rental property going forward. Other advantages of property investment:
● It is an asset you can touch & see - many people prefer that.
● Housing shortfall - house building is continually behind expected levels, leading to a contraction of supply.
● Current low interest rate levels makes borrowing very attractive.
● The power of leverage - when using a mortgage to purchase a property the returns can be greater than buying in cash alone.
● First time buyers continue to struggle to attain the levels of >deposit required to step on the property ladder.
● Rental yields (on average) continue to be above 5.0% per annum, considerably more than cash deposits.
You can understand why so many are using property as an investment. But is it all good news? What should you also consider when reviewing property as an investment?
Unlike many financial advisers we are investment ‘neutral’. A fair number of our ‘clients’ have property portfolio’s - in fact we have a portfolio of our own - so I write on this topic from experience. So let’s have a look at the factors you need to consider:
● Liquidity - Property generally takes time to buy and sell, so be prepared to have your money tied up.
House prices can FALL! We have been sheltered by dramatic price falls by very low interest rates. When interest rates do start to rise this will probably have an affect on prices. Ask yourself - could you cope with a price drop of 20-30%.
● Leverage works in the opposite way when house prices fall - you could lose your deposit if prices fall.
● A large cash lump sum is required - even if you purchase through a mortgage (of at least 25%).
● Make sure you factor in maintenance costs; renewals of fixtures & fittings, rental voids and non-rental payments. Ask yourself, can you maintain the monthly payment and expenses if the rent stops coming in?
● Tax #1 - many invest in property to pass on the asset to the next generation - which (previously) was not possible with ISA’s and pensions. Pensions are now a very attractive vehicle to pass on wealth to the next generation - potentially tax free. Investment property is included in the calculation of your estate and can be charged for inheritance tax. That’s 40% of the value not 40% of the growth.
● Tax 2 - Unlike pensions & ISA’s, tax is payable on both capital gains and income on investment property. The recent summer budget announcement has also increased the amount of income tax payable by higher & additional rate payers starting from April 2016. In addition the Wear & Tear allowance has been removed, which will also increase the level of tax payable by all who claim it.
As with all investments, property investments have their pro’s & con’s. Before embarking on any purchase do your homework. Property investment is a business. Understand the type of property and tenants you would like. Research your location, visit a large number of properties that are for sale but also that are for rent (so you can see how other landlords in your area are presenting their properties). Get advice, be wary of ‘property guru’s’ and remember its a long term game not a get rich scheme...
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