Should I buy a buy to let (BTL) as an investment or not? I am sure that many clients are wondering whether they should invest their hard earned savings into a buy to let property or not. Is the market at a peak? Where should I invest? What will my returns be? Property can surely only increase in value can’t it?
As a financial planner I get asked a question about BTL at least once a week. We have clients who we have helped develop successful buy to let strategies and clients who we have helped decide that it is not for them and an alternative strategy is more suitable. What I hope to do in this piece is outline some of the considerations that must be taken into account before you decide what is right for you. This is not a full list but rather a starting point.
The first thing I would do is write down why you want to do a BTL and what you want to get out of it. Quite often the reasons come down to the herd mentality and the fear of losing out – “everyone’s doing it aren’t they” or the “chasing a quick buck” concept. This is particularly true at the moment with daily coverage of house price rises (at least in London) and concerns over a housing bubble. I don’t want to get into the bubble argument here – that is a whole blog in itself! Good reasons that often come to the fore are – it will provide a good level of income; I have experience of property and know how to add value; I want to pass this BTL onto my children in the future; it helps me spread the risk of my investments; it really interests me.
Work out what return you expect
This is where you have to decide on some good conservative assumptions. Ask yourself: what am I going to invest from my savings?; How much will the mortgage be, including fees for solicitors, valuations?; and, if like most people you get pulled into 2 year mortgage deals, what will the re-mortgage fees be in 2 years?; Am I going to use a lettings agent or do it myself? If you’re using a reputable regulated agent then I would expect additional costs of 7-12% per year. If you’re doing it yourself then you need to factor in the time cost of finding tenants, credit checking, contract signing, co-ordinating utility companies etc. Depending on contacts this could be as often as every 6 months. Repairs and the Monday morning phone call – if not using a lettings agent (who will contact you anyway) do you have a support network plumber, electrician, etc near the property? Factor in an annual cost for this as well as refurbishment – tenants will not look after the property as well as you. Consider insurances and accountancy costs – you will have extra returns to do with the HMRC, are you going to do the self-assessment yourself or an accountant? And then there is the additional tax to pay – income from BTL is taxable as earned income after allowable deductions.
After you have done this, work out the net income you would get. Now run a couple of scenarios and you can make your own at this point, for e.g. what would happen if interest rates went up by x%? We have been living with incredibly low interest rates for a long time now THIS IS NOT THE NORM – INTEREST RATES WILL RISE. What happens if the property is untenanted for 3-6 months? If any of these scenarios lead to you having to cover the cost of the buy to let out of your own income, my personal opinion would be don’t do it.
What is the end game here?
Write down on a piece of paper what you want to do at the end. This is really an extension of the why? Are you going to build up a residual income with many buy to lets? Are you going to sell them all and repay any mortgage debt? Are you going to give them to your children? if so, when are you going to do this? What taxes will you have to pay – hopefully capital gains tax as that means you will have made a profit but how will you meet this? What will your finances look like afterwards?
I think that buy to lets are a potentially excellent investment but go into it with your eyes open and having answered the above questions to your satisfaction. A good financial planner will help give you clarity on what your numbers will look like, how it will work for your specific circumstances and provide you with a clear picture of where you will end up – taking into account all of the taxes, costs and variables we have covered above. My firm works with clients in Wimbledon and London helping to answer these questions and delivering personal solutions that work for them. I can be contacted at firstname.lastname@example.org or visit our website www.gemfs.co.uk.
By Elliott Swatton
Chartered Financial Planner