Buy- to- let - would you do it?

[user3964]

Considering buying a flat as a second income (& because I want to have somewhere to throw the DCs out to when the time comes) and to hopefully take advantage of property price gains, long- term.

It seems foolish to throw more money at the pension pots than we already do.

Not confident to play the stock market personally.

What else can you do to prepare for retirement if it's not buy a property? BUT having had relatives do this - it seems fraught with tension and pitfalls!

Would I be unreasonable to think that there's not much more I can do to invest for the future?

Does anyone have any advice for a first- timer? Or any reputable source of advice please?

[StirredNotShaken]

OM bloody God! I have just spoken to my daughter about this with a view to actually doing it and I thought where could I go for advice. Ah, MN is the place! Lo and behold the first thread in this Topic is this. The very question I want the answer to. I hope someone comes along with some sound advice as I am going to stalk this thread!

[Oly5]

Same here, can some wise people tell us? I don't care about the income as long as it covers the small
Mortgage. I'm thinking more long-term

[StirredNotShaken]

I want to buy a house/flat to rent for the value of about 200k. I won't have the capital obviously but i need it to make a decent income. It seems a waste to have it in various accounts where ir earns next to nothing and my finances are a shambles! I'm figuring an income from renting out and the security of having the house to re-sell if everything goes tits up is probably a better idea. I hope a wise woman comes along soon.

[MancMum01]

I am doing this and you will get a lot of people saying it is the wrong thing to do but you need to look at the numbers, look at the tax implications, your other investments and work out your ability to cover any costs if your property is not tenanted.

for me, the numbers make sense, it expands my investment portfolio and I am comfortable to cover the costs if tenants move out for an extended period of time. The returns can be OK but the stock market can out perform for a lot less effort..

all about your own situation I would say - there is no perfect answer

[StirredNotShaken]

MancMum - now that has confused me more than ever!
What does that all mean?

[sparechange]

It isn't a guaranteed bet by any means but history has shown it to be good one which has out performed other investments.
Some people object for moral reasons because it makes things harder for first time buyers so expect to get some stick from them on here...

Things to think about: there is now additional stamp duty payable on second homes. If you own your home, you will have a stamp duty bill for any rental property.

The interest rates on rental properties is higher than owner occupier and they require a bigger deposit, typically at least 30%

You can't offset the interest against tax anymore.
In the old days, if the mortgage was £1000 a month, and £800 of that was interest, and the rent was £1200 a month, the income would be the difference between the interest and the income ie £1200-£800. So tax would only be payable on £400
The rules are now changing so the entire £1200 is classed as income and tax will be owed. So as well as paying the mortgage and upkeep, you also need to pay tax. If you are a lower rate tax payer, it's 20% of £1200 so £240 a month. So you'll potentially be having to subsidise it every month
You also need to have a contingency to cover months when you don't have tenants, or you have tenants that aren't paying the rent (and then also the legal fees to take them to court to evict them)

And when you come to sell, you also owe capital gains tax on any profit you've made from the place going up in value.

So do your sums very carefully and make sure you've got enough to cover all eventualities, including paying the mortgage for months at a time and paying for new boilers and kitchens and upkeep. Bear in mind with flats, you often won't get to chose when the windows and roof are replaced - the management company decide and then send the bill to each of the leaseholders with a deadline to pay

But equally, if you can stick with it for the duration of the mortgage, at the end of it you've got a regular income

[MancMum01]

sparechange has expressed it better than I could!

I would suggest you need to ensure you do not have all your investments in one thing - so do not put all your money into property but rather spread it across investments in property, stocks etc - you need to balance your exposure so that is one fails badly, you do not lose everything.

if you are going to mortgage to buy a place, it is complicated tax wise as per above so you need to be aware that income and capital gain is all taxable income. Plus you have risk with a debt if you cannot service it.

If you have spare income and you take good advice it is relatively easy to make good returns on the stock market with a lot less effort - but property is a solid investment so you need to look at the numbers involved in buying a place and maintaining it and balance it against the relative ease of buying into stocks..

[StirredNotShaken]

Thank you for all that - I would buy outright so what happens with any income from rental then?

[MancMum01]

you still get taxed on it as per standard income and then you would be exposed to capital gains tax if you sell it.

[MancMum01]

if you are UK based, here are the rules on tax

www.gov.uk/renting-out-a-property/paying-tax

[PinkFondantFancy]

How will you use it to fund your retirement if you DC are living in it?

[Quickqu]

We have two BTL properties. They are in London so our returns on them aren't brilliant but I'm hoping the capital gains will be great if we can hang on to them for a while.

It can be stressful - you need a good team of plumber/electrician etc for when things go wrong and a fund behind you to cover the mortgage in void periods.

Having said all that, I'm really glad we're doing it. We are pretty short of cash in the short term but I reckon it will be well worth it later on.

[AlexandraEiffel]

I thought the change to tax and mortgage interest was only for higher rate tax payers. When did that change?

[MancMum01]

rules stay same for standard rate tax payers as per above - The tax changes, which begin in 2017, will see landlords lose a quarter of their higher-rate relief each year until 2020, when it will be restricted to 20pc on all mortgage interest

[user3964]

Stirred I'm looking st a similar outlay...

Yup empty periods are a worry. I ned a spreadsheet, to see if this is all affordable.

The stock market may be less time consuming - but for a relative novice it's not particularly appealing either!

Pension - who knows if it's worth doing anything there. It feels like such a gamble.

So really - what are people supposed to invest in? Clocks? Gold? Art? Wine? I know very little about any of them!

[StirredNotShaken]

user I am utterly confused - I think stocks would scare the shit out of me!! Imagine if you had stocks and then Brexit had happened - I;d be petrified of that. I will watch this thread with interest and take on board the information and advice provided.

[Needmoresleep]

I would add to Sparechange's post.

Tenants are people and living in what is their home. You are running a business using your own money. Agents want to make money and do not always act in your interest.

There is lots of scope for conflict. You need to be able to rise above most. Don't ever expect tenants to look after a garden, and some people simply never clean or tidy up. And any complaints from neighbours come to you. Also if you find domestic stuff like boilers breaking down, roofs leaking etc, difficult, do you want another set.

You get a better return on property partly because of the work and risk involved. You need to be assertive, like standing up to agents who try to foist tenants on you when your instincts say no. You also need to be able to maintain constructive relationships with tenants who may be difficult. And trusting ones with tradespeople. You also need to stay on top of the admin.

Contrary to standard advice and practices I would consider repayment mortgages. It means you have a cushion should interest rates rise or property prices fall, and is effectively paying into a pension. If you then find yourself squeezed, you can switch to interest only rather than be forced into a panic sale/repossession.

But having said that, having bought rental property 20/25 years ago with mortgages almost paid off, means we are looking at an easier retirement than many of my friends. And scope to help DC onto the housing ladder.

[NotCitrus]

Following with interest. We're currently considering BTL as I already rent out our annex and manage another flat, SIL has a large pot of cash, and BIL is a plumber/electrician/gas engineer. So if we bought a place near BIL (affordable student city), SIL owned 60% and me and BIL 20% each, potentially SIL (almost no income) could earn the rent and pay me and BIL to manage the place. Would need to establish all the rules on income and paying family, though, and a document for agreeing when to sell the property, not to mention deciding whether to take out a mortgage for a larger place vs what we could afford already.

[MancMum01]

the stock market has actually been higher than for a year since the post brexit slump. The thing with shares is you need to take a long term view and never put all your money into shares as if you needed it all on the day of a slump, clearly you are buggered. hence why annuities are a bad idea as payout is fixed.

Property again is a longer term investment now unless you can buy without a mortgage as often the rents do not cover the full cost of mortgage and the taxes, maintenance, service charges etc. It is generally hard to make an income now unless you go interest only. i have to pay about 30% of the overall costs of my BTL even when the property is tenanted but I think it worth it as I will own it in 10 years having only paid for 33% of it myself.

I think it worth reading up on shares as it is easier than you think - especially if you buy into tracker funds..

[Babyroobs]

My dh will be in a similar situation soon, will have around £150K (possibly) to invest somewhere and we are thinking a BTL might be the way forward. We also are not confident investing in the stock market and interest rates are currently so low. It's either BTL or put some money into a bigger family home for us ( have 4dc's) but then I am worried about having to downsize again in a few years when the dc's have flown the nest.

[sparechange]

For those who want to invest in the stock market but don't know where to start, you can dip your toe with a stocks and shares ISA, or can invest in a fund, where the fund manager picks the actual shares and you just add in a fixed amount of money
this explains a bit more about the different types of funds

There is also something similar for property, so instead of you buying a BTL, you invest in a company that buys lots of BTLs and then splits the profits with those who have invested. I'm afraid I don't know much about these companies, so can't recommend them or suggest a name, but someone else might be able to give more info

[user3964]

Spare change - interesting that there are group BTL buyers. Does anyone have any experience of this?

[specialsubject]

Stock market very high at the moment, recovered rapidly after the vote. Interest rates negative after inflation so savings are being destroyed. So if you have money there isnt anything else than property.

Btl with a mortgage doesnt make much sense. Without can, but look hard at all real costs including insurances that will actually pay out. The kicking you can get from all the ethical sweetybumps on mn is NOTHING compared to what a tenant can give you.

[Shakey15000]

Following to read later

[tribpot]

This is an interesting article comparing the 30 year performance of shares and property.

Shares are a lot less work than property and much less emotional as well. It's easier to dip your toe in and you can track a 'pretend' portfolio online where you enter a number of shares as if you had bought them and it will track their performance over time, meaning you can do some risk-free learning in a way that doesn't really exist for property.

Leaving aside the issue of BTL landlords pushing up house prices, there are way too many amateur landlords who do a crap job - it's easy to read on here about tenants who are unable to contact their landlords for weeks at a time, or where repairs are not done, etc. It's much more like running your own business and poorly-run businesses will often fail. I'm not suggesting anyone here would be a crap landlord, but there can be a lot of work.

I'd do some serious research into what both options entail. The Motley Fool has lots of information for novice investors to get started - as sparechange says, it can be much lower risk than it sounds if you use an index tracker or managed fund.