Is Buy To Let a Good Idea at the Moment?

[JandLandG]

Firstly, I do understand that there is a bit of a moral issue with Buy To Let. I'm not naturally a landlord type myself, but laying aside the arguments about exploitation or artificially keeping the housing market out of reach for younger people, I wonder what people might think about getting into Buy To Let at the moment.

Bit of background first: we're lucky enough to have plenty of equity in our home, but we don't really have much in the way of savings or pensions.

What I'd like to do would be use our equity to invest in property and rent out long term so that we would have the asset more or less paid off in 20 years time.

With a fair wind, I don't see why we wouldn't be able to build up a little portfolio so that as well as some pension provision for ourselves, we could also help ensure that the children could go through education without ending up in 60/70/80k worth of debts or whatever it would be.

So, what does anyone think?

I wouldn't expect any capital gains in the short or even medium term, but it would be nice to have something ticking over in the background.

Having both been a landlord and a tenant over the years, I was happy with both arrangements both times and am just wondering whether now is the time to delve back into that world.

I don't think the Euro will collapse, but we'll wait and see. The economy round here (SW, not too far from Bath) isn't too bad, fortunately and obviously I'd take into account the interest rates won't always be this low. Families rent houses now in a way that they didn't a decade ago, so that's the market we were thinking of going after. We rented here ourselves for 18 months after re-locating.

So, risk some our our (not-very-hard-earned) equity to feather our nest for the future? To be honest, I can't see of any other way of providing a decent pension for ourselves. Or helping the children out when they need us.

We're in our 40s now, 3 young children and all fine, but feeling like we're all getting a bit older and would like to plan ahead. We're very lucky to be healthy and happy, but don't want to struggle when we're older.

Anyway, sorry for the long one, but any thoughts/ideas/opinions/experiences would be welcomed.

[MrsMiniversCharlady]

I don't know a huge amount about buy to let, but my first thought is how would you pay the mortgage if you have a void, given that you don't have any savings?

[JandLandG]

Yep, that is a good point, MMC

Having done a bit of research, I'm fairly sure we'd be well-placed to let it out (given the right property in the right condition at the right price etc), but unoccupied periods would be taken into account when sorting our final details.

We have a bit to fall back on, and we might even need to top up the rent we receive each month to pay the mortgage, but all those details would be looked into thoroughly when we were finalising what property to buy.

Very valid point though, so thank you. There must be other, similar points that I haven't thought of, so all thoughts welcomed.

Really, I suppose I'm looking at a comprehensive list of what could go wrong...high interest rates in the future, collapse in the rental market, higher taxes on BTL earnings, total meltdown of world economy, that sort of thing!

Whatever the way, we're thinking that if we could get other people to live in our house(s) for a number of years, if we played things right and all things being equal, at the end of x years, we'd own x per cent of the property.

Which is better than the situation now....about £500 a month pension according to latest estimates from the Norwich Union...that won't keep us in wine in our twilight years, will it?!

[kellykettle]

I became a landlord by circumstance rather than design. It has been very straight forward so far though not a huge money spinner in the short term, line you say.

Like you I worry about the future, providing for our children and being able to afford retirement. If the sums add up I would go for it.

[CherylWillBounceBack]

Go for it. Once a politically acceptable percentage of housing stock ends up in the hands of 'investors', rather than 'hard working families', all the fake props (low interest rates, banks sitting on properties, reluctance to repossess etc) will be removed and the bubble will finally be allowed to burst. That's what the cynic in me says anyway. So please feel free to help that along!

[ThisisaSignofthetimes]

If you have little other investments you are going to be doing what all investment professionals would advise against, putting all your eggs in one basket. You will only be investing in one asset class, and one that may not be particularly liquid when you need to realise it to provide you with an permenent income some 20 yrs down the line.

BTL is very tempting as a pension as you can borrow to invest, unlike shares which you can't. You will need to take into account, void periods, maintenance and agency fees and work out what the yield is going to be on your investment. I believe that you can offset interest paid on a BTL mortgage against the tax due from the rent, so I assume from a tax planning perspective you would go for an interest only mortgage, all the capital would remain outstanding.

Personally if you are looking at an investment horizon of 20 yrs plus I would be tempted to diversify and invest in a spread of investments via a personal pension, you can have access to thousands of different funds plus get tax refief on your contributions.

[ThisisaSignofthetimes]

cheryl I agree and the politicians desire to raise more taxes makes BTL an easy target.

[oreocrumbs]

If you get a buy to let, you need it to either make a profit or cover its costs untill you are done with it.

So if now, at the lowest intrest rates we will have untill well after your retirement, you would have to add money to the rental income to meet the mortgage payments, you will lose out. There are the void periods, insurance, maintenance, etc to pay out too.

I don't know a lot about pensions, but if buying a house would end up costing you X pm to leave you with a lump some of approx Y in 25 years, then you need to look into other pension options and see what is comparable.

That is not to say its a bad idea, I'm a LL and it is my intention to but more property over the years to be part of my pension. But any house I buy will be when I come accross one that will cover its own costs.

Another thought, I presume, if you are talking about buying a family house near Bath you are looking to invest a fair whack of money - think about it as a business. I rent out houses in areas that are cheap. They have a high rental market, I accept HB. I get a much better return spreading my money and buying a few cheap 2 bed houses, rather than one lovely family house.

[JandLandG]

Great input...keep it coming, much appreciated.

Cheryl, I fully take your point; I'm a homeowner now and have been for 12 years, but a part of me wanted the whole pack of cards to come tumbling down 2/3/4 years ago just to stick one to The Man(!).

That it didn't during that period probably means that it never will...governments just won't let it happen in this day and age of the "home-owning democracy".

There will, of course, always be the haves and have-nots...fortunately for me, I'm in the former category at the moment; it doesn't mean I'm a Horrible Selfish Tory, but I'm just trying to weigh up what to do with the equity at my disposal.

The "cash" we've built up will give us access to more cash and therefore to an asset that someone else will pay for for me over the years; capitalism in its very purest form, I suppose.

Thanks for your thoughts, This. Again, much appreciated, but shares etc etc seem so intangible and under the control of those hideous barrow boys in The City. I just can't see it building up any kind of nest egg (though I'd love to be convinced) - my crappy little Norwich Union pension has been battered in recent years...property seems so much the better bet somehow.

Thanks, Oreo...again, I know what you mean...I haven't done my sums yet, but, knowing the local market (and having been in it on the tenant side), I'm sure we could make it work with family houses...but not excluding smaller/cheaperhouses in the future, obviously. Bath itself is too expensive to expect returns, but just outside is v popular and much more affordable.

Again, I haven't done any final figures, but been pondering/researching for a while.

Any more for any more?

[thisoldgirl]

You are putting all your investments in one investment class and that is incredibly risky as others have pointed out.

The rule of thumb is 30% of your net worth should be in property, 30% in pension, 30% in cash and cash equivalents, and 10% in medium and high risk investments such as equities.

Is your mortgage paid off? Another golden rule is that - barring a rainy day cash cushion - you don't start investing whilst you're servicing debt.

[JandLandG]

ToG

Again, I appreciate your taking the time to post...and that's definitely a good equation - I've heard it before, but thanks for reminding me.

I'm loving all these negative points, I really am; I'd love to be talked out of this, but I'm not especially convinced.

Especially not by "you don't start investing whilst you're servicing debt."

They say you've got to speculate to accumulate, don't they?!

We've got 80k mortgage left on a house notionally-valued at 400k. Should be paid off in 10-12 years depending on interest rates/earnings etc, but I don't think its wise to wait that long to sort out the children's and our future.

Or not, as the case may be

[thisoldgirl]

Interest rates are nominally low (they aren't in real terms, especially where BTL loans are concerned) and this can make property seem a very good capital investment at the moment, but you need to think about yields before you make a decision. I am very bearish on long term capital growth but there's no denying rental incomes are attractive.

You'll need a 30% cash deposit on a BTL mortgage, and the monthly rent should be 125% of the monthly rent. You need to earn a minimum of £24k that is not derived from property, and should allow the equivalent of two months' rent a year as operating costs (which could be voids or repairs or legal expenses).

From your 'speculate to accumulate' comment you clearly have a high risk profile so perhaps check out the forums on the Motley Fool too - it's like MSE for rich people .

[thisoldgirl]

The monthly rent should be 125% of the monthly mortgage. Obvs.

[alabamawurley]

"That it didn't during that period probably means that it never will...governments just won't let it happen in this day and age of the "home-owning democracy"."

I'm afraid assuming that because something hasn't happened so far it won't is poor logic - house prices have been supported (to an extent) so far by a number of government/BofE backed props. The upshot of this is that prices are being kept artificially high; to assume this is any kind of status quo would be a grave and possibly costly mistake I fear.

Remember also that as more turn to renting, the days of a 'home owning democracy' could be numbered and LLs could be an easy target, particularly as renters become a more politically important demographic.

Also worth bearing in mind that as disposable incomes are eroded through cost inflation (exceeding wage inflation) and benefits are increasingly cut, how will tenants pay the rent?

Long-term, where will capital appreciation come from? As baby boomers start checking out, who will be buying their glut of homes? Today's youngsters saddled with massive student debt, and record unemployment?

Finally, most professional LLs wouldn't touch a property unless the rent comfortably covered mortgage repayments, to allow for voids, maintenance, insurance, legals, tax etc. If you are even thinking that you may need to top it up with historically low IRs then you are on to a loser from day one.

Don't get me wrong I do believe that there will be future opportunities for property investment (probably when nobody else will touch it with a bargepole!) but that time is a long way off in my opinion.

Sorry bit of a ramble but I hope it helps.

[herhonesty]

Paying of the capital on a btw mortgage makes the venture fairly tax inefficient. The point about investment in btl is making money on the capital appreciation. You will effectively be double whammying yourself - paying progressively more tax on rent and capital gains tax when you sell the property. Professional btl'ers aim to pay as little tax on the rent as possible, maximise capital gains in the long term.

An alt scenario is to buy a better house for yourselves, pay of the mortgage quicker, and downsize when you retire, avoiding tax altogether.

But you sound pretty convinced.. So this prob falling on deaf ears.

[JandLandG]

Morning, all

This is a great response to my query...many thanks to all for taking time out...it is very much appreciated.

Great points, Alabama (and very professionally made - have checked you out on other threads and you obviously are on well top of this subject)...just what I was looking for. To be honest, I've been saying for a while that our kids will chuckle to themselves when their generation is asked to buy our generation's houses..."i've got 70k's worth of student debts and you want me to pay how much for a house?!"

And, yep, we haven't reached the bottom by a long way yet - I'm in no rush - but I do feel BTL is the way to go. Provide a service, risk some money, play the long game and benefit down the line.

OldGirl, The 125pc rule is one that I was aware of...probably can't always guarantee that, but I certainly would not use the interest rate at the time of taking the loan out as the median rate over the 20 year term.

Ditto, HerHon...I'm aware of your points, and like I say, I have not made up my mind and would like to be convinced otherwise.

Not sure about your point about buying a bigger house for ourselves...we'd have to pay for it!

I want someone else to pay me for living in another house that we "own". Capital appreciation, as I mentioned, is not something that can be guaranteed in the short, medium or even long term, but if we buy A House now, it will be worth the exact value of A House in the future. An asset for us and the children. Concrete. Real. Tangible. Bricks and mortar. A place to live with intrinsic value will always be worth having...especially if somebody else has paid or it!

As I see it at the moment, we have equity in our current home which could be working for us. BTL seems the best option to maximise it's utility. It requires expertise and good decision-making, of course, but compared to the alternatives for future investments (stock markets etc, building up a company, betting on horses(!) etc), it seems an accessible and do-able way forward.

We could just carry on as we are, of course. Paying off the mortgage and living happily ever after....we'd be living on £500 a month when we're older, the kids would be 50k in debt after university, but we'd be fine. Health and happiness is the main thing to us, of course. BTL would put our equity - and ultimately our family home - at risk, but I'm looking for a way to improve our future so that risk is the price you pay for possibly enhancing our finances down the line.

Anyway, ramble over, keep em coming if there are anymore thoughts...really good points so far.

[thisoldgirl]

"BTL would put our equity - and ultimately our family home - at risk"

This, for me, is the dealbreaker in terms of taking equity out of your own home to speculate on the property market's growth. The downside is just too great. All your eggs are in one basket and if the market crashes (as it did in the 90s) just as you're retiring, you could face a penniless old age.

Hence the standard industry advice, which is not to get into speculative investments until you've paid off your own mortgage.

You're also not appreciating that you'd get an income from other sources if you invested the money in other areas and spread your financial risks.

It sounds like you've made up your mind and are using us as a way of testing your own arguments. Which is reasonable, but also a waste of your time.

If you're determined to do it, set yourself a time limit of ten years (the minimum needed to make money on an investment that leverages debt) and see how you get on .

[RCheshire]

Whether BTL is a good strategy or not depends on a number of assumptions you have to make:

• what will the void proportion be?
  
• what rental income rate can I expect or how do I expect this to change over time?
  
• when I expect to sell, will the capital value have changed, in which direction, by how much?
  
• are this government or subsequent likely to take BTL/second homes more heavily than today?
  
• am I sufficiently protected from other events (partner death, job loss, disability)
  
  Now you'll nod and say "those are all obvious factors to consider". But my point is that to make a logical decision you acually have to answer those questions, i.e. write down the answers and your workings and reasoning for each one. GEt sonmeone else to challenge.
  
  If I can be slightly blunt, you have got into your 40s without much in the way of savings nor decent pension provision and you're essentially looking for a 'get rich quick' scheme, as opposed to saving throughout working life/paying into a pension from 21 etc.
  
  That's fine (plenty in the same boat), but trying to 'catch-up' on not putting money away in the past is always going to mean higher risk investing as you know.
  
  Personally I'd be very nervous of going down the BTL route unless it was a small proportion of my portfolio. We have yet to see house prices genuinely tumble.
  
  I have to agree with the earlier poster who challenged your statement "That it didn't during that period probably means that it never will...governments just won't let it happen in this day and age".
  
  I presume you're aware of the vast house value falls in much of the US, Spain, Ireland, N Ireland? This wasn't a case of governments wanting to 'let it happen'.
  If you exclude those within the Euro and look at say the US and N Ireland, how are they different to here? We have a larger bubble if anything, so the key difference is that we've had less house building over the last decade.
  
  You'll see that recently announced government policy is leaning towards encouraging more house building and more house extensions - which over time will obviously put greater price pressure on those looking to sell.
  
  Even if you assume capital value stagnation in the period of your onwership rather than falls, what rate or return do you expect after fees, tax, interest on your own mortgage you'll have increased?
  
  My best performing investments currently (i.e. during 2012) are corporate bonds. They make sense as an investment today (banks don't want to lend so companies are forced to borrow more fro the markets > higher rates due to competition). Houses don't make sense as an investment today (see the posts by everyone else)

[thisoldgirl]

RCheshire Yours is an excellent post. If I may disagree on one point, it's that rental income is still very attractive if you own a rental property outright. I'm seeing yields of 8% and 9% which in a time of superb low interest rates is great even when costs are taken out of the equation. Hassle factor, of course, is something else .

[thisoldgirl]

Super low, not superb low. Obvs.

[RCheshire]

thisoldgirl, yes if you own outright it's a very different picture. Think I'd be unlikely to go down that road because the hassle doesn't appeal.

My portfolio is averaging ~4% net (that would be higher but much of it is accessible as we are looking for a house - to live in I should add)

Taking on BTL when you have to pay interest on the loan and there's a good chance you won't see capital appreciation does not look sound to me.

[dreamofwhitehorses]

Some really useful advice on this thread I'm interested in this as we have no mortgage but no pension either (self employed) I've wondered about buying a holiday let -cheap holidays for me and family members, and an income from it the rest of the time. What's the opinion on something like that?

[thisoldgirl]

Dream See, I'm going to do an about-turn now. If you're self-employed and in an industry that is prone to ups and downs, rental property that you own outright is pretty much the best pension you can get. This is because your capital isn't tied up quite as tightly as a pension. If business is bad, (and provided you have an understanding bank manager) you can take equity out of the rental property and re-structure your borrowing. Even if the bank's computer says no, you can at least always sell and recover some or all of your capital.

You just don't have that security with a pension - even though it's so much more tax efficient - and business people need that flexibility.

[thisoldgirl]

I don't know much about holiday lets (in fact see the thread I've just started) but one thing I do know is that they are very, very high maintenance. It's almost like doing a tenant handover every week or every fortnight. It's also more prone to voids and the most profitable periods of rental will inevitably be the time that your family most wants to be there. All the hassle, with very little pleasure. I'm not sure I'd do it, owning outright or not.

[thisoldgirl]

If I were starting my property career again (glad I'm out of it now, but that's another story), I'd look into buying and converting big houses into individual 'lock up and leave' apartments with resident care.

Target young healthy pensioners but build in futureproofing so they can stay in their own home and their own community when they become infirm.

There are a few companies already doing this but I can see how local landlords would find a market too.

[JandLandG]

This is a great thread...thanks so much for all your thoughts...haven't got time to contribute further atm, but perhaps I should also add that I'm self employed and also paying a few quid (£250 a month) into a stakeholder pension.

Also, I can't agree with the point about facing a "penniless old age."

A) I wouldn't risk everything for BTL...just use some of the equity in our home

B) I'll emphasise again, surely if somebody has been paying your mortgage off for years, at the end of the day, you should own at least a decent per centage of a property.

Figures to illustrate:

Buy a £100k house

Even if you only get someone to cover the capital repayment mortgage for say 70% of it over the years, when you come to sell it, you will own 70% of the value of the sale (minus CGT/expenses etc).

Let's assume no capital growth.

Buy, set up and rent a property and take the risk while the tenant pays the mortgage.

Sell the place in 20 years for £100k

Pay the rest of the mortgage off.

Pay tax/expenses etc.

You have more or less £50k profit. (i.e. pension/to give to the kids to alleviate University debts etc)

Is that not how it works?

Thanks again...off to do some work (did I mention I was saving up for a BTL! )