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Savers are faced with a difficult choice at the moment with interest rates plunging towards zero – which is the better bet stocks and shares or bricks and mortar?
Until April 2016 many investors were confident that the buy-to-let market was the best bet for securing a decent long term return on their savings. The Chancellor then announced a 3% increase in stamp duty on buy-to-let and second homes and many investors became less sure particularly as this followed on from an earlier announcement that tax relief on buy-to-let mortgages was to be scaled back to just basic rate relief over five years. Now the Brexit vote has introduced further uncertainty into the property market and many question whether investing in buy-to-let is really worth it.
What you need to know
A long term investment
Our advice to any potential buy-to-let investor is always the same – it’s an investment for the long term. It’s a lucky investor who can pick the precise moment that a market has reached its lowest point and be in a position to buy in at precisely that time. Conversely nobody wants to find out that they have plunged in at the top of the market and then seen their investment plummet over the next few months as the market falls.
But historically property markets have consistently risen over the long term so any investor should be confident that irrespective of what point they choose to invest the value of that investment will rise over the several years that they hold it.
If you don’t feel confident that you will be able to sustain your investment in the long term, then think twice before putting your money into a buy- to-let investment.
What do we mean by “long term”? The absolute minimum we recommend is five years (ideally ten) but the longer the better is normally the rule. As part of our management service we keep our investors up to date with market trends and help them decide the optimum time to buy and sell.
Is now a good time to invest?
There is a general feeling amongst experts that as the tax relief changes are phased in there could be a slowdown in buy-to-let activity. However rental demand is still outstripping supply in most areas of the Country so there will continue to be good opportunities for buying in those areas. According to ARLA, month on month demand for rental accommodation was up in June as was the supply of rental properties on agencies books. There were 37 prospective tenants on average registered per ARLA member branch which was an increase of 4 over May. The supply of rental properties rose by 3% in June.
In our view there is still a place for buy-to-let investors but they do need to be more selective about type of property, area and price.
Profit (or loss) from a buy-to-let investment comes from two sources – the yield on the rental return and the capital growth on the price increase (obviously only realised when the property is eventually sold). The safest approach is to look for the highest possible yield on the rental return which will guarantee a good profit over the lifetime of ownership.
For example, if you were to buy a one-or two bedroom flat for say £240,000 and rent it out at £1000 per month for 20 years you would receive gross income equal to your original purchase price. Any capital growth in the property would be a welcome bonus. Any expenses (such as mortgage, fees, tax etc. would need to be factored in to arrive at the net profit).
So in terms of location it is worth searching around for a high yielding area with strong rental demand. Close proximity to transport hubs such as stations with fast commuter links to major cities, hospitals (a captive market for nurses and other medical staff seeking rented accommodation near to their place of work) and universities if you are looking to enter the lucrative rental market for students all tend to be good locations for buy-to-let investment returns.
Buy-to-let comes with set up costs such as the purchase price, stamp duty, conveyancing bills and mortgage fees (although these can be added to the loan). In addition, you will need cash to buy furniture etc. if you plan to let it furnished.
Ongoing costs include agent fees if you use a letting agent to find you a tenant (recommended as they will ensure that you avoid falling foul of the associated rules and regulations) and ongoing repair and management and dilapidation costs.
You will also need to factor in any “dormant periods” when the property sits empty between one tenant leaving. and the next arriving.
Landlords can currently take advantage of strong competition in the mortgage market with interest rates on offer at well below 2% (assuming a high deposit (often 40%) and subject to administration fee (typically around £2000)). Also be aware of potential legislation to extend the stricter rules governing the amount that lenders can lend which currently apply in the residential mortgage market.
Using a good mortgage broker with specific experience of the buy-to-let providers may help you find the best deal.
The downsides are that income isn’t guaranteed and depends on getting tenants in quickly to avoid long vacant periods. It’s also an illiquid investment and if you need to sell urgently to realise your investment you may have to take a lower capital growth or even a loss if the market has moved against you. You also need to pay capital gains tax (currently 18% or 28% depending on tax band) on any capital growth.
The upsides are that you can obtain a strong profit yield plus the opportunity of a significant capital growth if the market moves in your favour.
Although buy-to-let investment is not for everybody it remains a potentially attractive alternative to sticking your money in the bank and arguably no less risky than investing in the volatile equity markets.
For further information or help in deciding whether buy-to-let investment is right for you please get in touch at thehomecloud.xenacia.com