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.

There are quite a few flaws in your numbers - not least of which is the fact that, if you sell an asset for the same price you paid for it 20 years later, you've actually bought a depreciating asset, not an investment. As an income vehicle it could make sense but you've ignored the risk of punitive interest rates or even high ones. If interest rates reverted to their long term historical mean of 8% for example, could you still afford to pay the mortgage on your rental property and on your own house?

But, as I said before, you seem determined to do it and there's no substitute for giving it a go.

However, you need to build up a substantial cash cushion first, and it will need to be six months of your annual expenses because you are self employed. You'll also need to have annual accounts for three years, and money on top for fees, as I assume you'll take the deposit amount out of your equity.

This is a very precarious arrangement, but it can be done if you can persuade a bank to believe in you and can take the sleepless nights. Entering an asset class just as everyone else is leaving made sense for Donald Trump, after all.

If you're considering buy-to-let as an investment, here are some top tips to ensure the venture is a success.

1. Research the market

Do you know the risks, as well as the benefits? If you know someone who has entered the buy-to-let market, ask them about their experiences.

1. Choose a promising area

Promising does not mean most expensive or cheapest. Promising means a place where people would like to live and this can be for a variety of reasons.

1. Do the maths

Before you think about looking for a property consider the cost of the houses you may look at and the rent you are likely to get. What will happen if the property sits empty for a month or two and you have financed the investment? These are things to consider.

1. Think about your target tenant

Instead of imagining whether you would like to live in your investment property, put yourself in the shoes of your target tenant. Who are they and what do they want? If they are students, it needs to be easy to clean and comfortable but not luxurious. If they are young professionals it should be modern and stylish but not overbearing.

1. Don't be over ambitious

For now the days of double-digit house price rises are gone, so invest for both income and long-term capital growth.

1. Consider looking further afield

Cast your net wide and look at towns with good commuting links that are popular with families or have a sizeable university.

1. Haggle over price

As a buy-to-let investor you have the same advantage as a first-time buyer when it comes to negotiating a discount.

1. Know the pitfalls

Before you make any investment you should always investigate the negative aspects as well as the positive. House prices are falling and if this continues, will you be able to continue holding your investment?

1. Consider how hands-on you want to be

Will you rent it out yourself or get an agent to do so? Agents will charge you a management fee, but will deal with any problems and have a good network of plumbers, electricians and other workers if things go wrong.

10. Get expert help and advice to ensure you find the right property.

I know nothing about if this is a good idea or not. However, in terms of locality, we kept my GF house in Keynsham when he died and now rent that out. Price was too low to sell v the very good rent you can get in the town. Has good shops, transport links etc. Might be worth a look?

Thisoldgirl - what do you mean by resident care?

Resident care = round the clock wardens and security, trained carers, and house and garden maintenance.

Basically a country house hotel, but with on-site care, and your own individual apartment which you could lock up and leave to travel or visit family.

The reason I mentioned local landlords is that many older people want to downsize but continue living in their own community, keep their own doctor etc, not move to a retirement village away from all their friends and personal support.

RedHelen Updating to add that there is a very detailed article on this very topic (retirement housing) in today's Voldemort.

My angle on it would be renting on very long leases rather than buying (so pensioners can free up their capital), and situating the properties in suburbs and cities, not just the countryside. If you've been a town mouse all your life, you're not going to crave the deep peace of the country in retirement. Beechcroft and other developers, take note.

The more I think about this idea, the more I think someone needs to run with it . Posh people used to install 'a couple' in a self-contained annexe when they got older. One was a chauffeur/handyman/gardener/security guard, and one a cook/housekeeper/nurse. Surely the key to making this affordable is sharing the couple between half a dozen small houses?

Anyway, stop hi-jacking! get your own thread(!)

So then, back to buy to let...where was I?

If any of the original (very knowledgeable) posters are still popping onto this thread, I'm still not convinced by the negative vibes I'm getting about my thoughts.

Also, you all seem to think it's a fait accompli...it certainly isn't, it's just an idea at the moment...I'm testing my ideas out here and I've yet to hear anything that would conclusively change the general way I'm thinking.

What other way can I use our equity to essentially get other people to pay us a nice pension?

So, I've had a thought. Perhaps I should turn this around. Sod it, I'm going to give you all a little summary of our position and see what you think would be the best course of action to follow financially.

Ok, if anyone's interested in giving some free advice , here goes:

Assets:

House valued at c 400k (Nov 2011). Nice house, nice area, good schools etc etc.

Savings: c 12k. Negligable, obviously, but we always pay spare cash into the mortgage.

Liabilities:

Outstanding mortgage c 80k

Income: freelance/self-employed (established 12 years) c 50/60k pa gross (reasonably steady, but you never know)

Usual bills but no other debt.

Lifestyle: No 60 inch plasma screens and new cars, but no sack cloth and ashes either.

Life Priorities:

To stay healthy and happy

Financial priorities:

A) To somehow crank up the measly estimated £500-a-month stakeholder pension (that currently costs £250 a month)

B) If possible, to shield the kids (12, 7, 5) from the prospect of 50/60k debts they'd have on leaving university (we are essentially financially conservative and I'm terrified of frightening the children off a good university education just because of the cost/debts. My education is the most valuable thing in the world to me and I'd hate the kids to miss out; a massive backwards step for our family that would be).

So there you go then. Anyone who's read this far, well done!

I reckon we're incredibly lucky, and in a great position and I thank our lucky stars for our health and happiness...but...

How can I use our equity in the family home to sort us out in the future?

Or should I just leave it there, downsize when we're older and the kids have gone, and use it then?

I think we can do better than that...

As ever, any thoughts, ideas, suggestions always welcome.

Sorry for the thread hijack, I went off on a tangent there .

You need an IFA to help you, not MNers who only know the topline about your circumstances. Everyone's an expert on the internet, and the amount of shite that is sometimes peddled on this site about really very specialist subjects - which could result in expensive mistakes for the OP - makes me cross.

FWIW, a time of super low interest rates is a gift to those in debt and it's difficult to argue against the value of paying off the mortgage as quickly as possible.

Once you've done that, look into spreading spare money across a range of investments, including rental property if you wish. Pensions are a special case because of their tax efficiency and you may want to increase your monthly contribution, but as we don't know your exact circumstances it would be unwise to say more.

Ha..no problem.

Yeah, obviously I'm not going to base our financial choices on a daft on-line forum (though I'm sure plenty of people do(!), but always nice to get feedback.

Will ponder some more, but I intend to take this further and see where we get to...as mentioned previously, I see it as a way of getting other people to pay for my future rather than shares/pensions etc that involve me paying and hoping some barrow boy charlatan snake oil salesman gets lucky on my behalf.

As you can probably tell, I don't trust City types and never have done. Its all strippers, hookers and cocaine, and yet their recent crimes and misdemeanours have been reported like we all thought they were choir boys prior to recent revelations.

And breathe...

I am completely with you on City management fees for pension funds, sharedealing etc. It's disillusionment with the City that has driven so many people in BTL, where at least you have the security of an income. (In a 'normal' economy, property was traditionally recommended for the risk-averse because it offered poor returns, little liquidity and high overheads!)

I've continued with my own pension simply because it's hard to match as an investment once the tax saving is included.

However, I now max out my ISA entitlement each year, and have started investing in shares of my own choosing through an Investdirect account with HSBC. (It's not the cheapest sharedealing account by any means, but keeps the level of complication down as I only rarely make trades). It's fun, I'm investing in those business areas that I know well (probably know better than the City analysts in that sector), and I'm spreading the risk. But YMMV.

YMMV???!!!

Your mileage may vary .

Cryptic!

Anyway, will step up my research...and speak to an IFA, but I find many of those types fairly unambitious and unimaginative...and driven by commission (as you might expect).

I trust our financial judgement and acumen...we're lucky, but you make you're own luck and we've made good decisions in the past...let's hope we don't f*!k things up royally if we plump for property over other things! Like you say, a varied portfolio is the way forward...but real, concrete, bricks and mortar that someone else is paying for seems tempting...

It's definitely important to maintain a degree of detachment about IFA advice - it's your money, no one else is going to care about it more.

Although to some extent you are going to have to be unambitious and unimaginative because your eldest child is going to make a large call on your income in just 5 years, and you can't afford to speculate to the same extent as someone who has younger or fewer children.

You have 3 good kids, have paid off most of your mortgage and have a healthy annual income. You're already way ahead of most of the population

As a final sign-off, don't stress too much about student loans.

Those debts are your children's responsibility, not yours. Other countries have had them for decades, and their kids manage to repay them.

Yeah, I take your point about student debt, but as it's a "new thing" in this country and certainly taking on debt is not in our family tradition/culture if you like, it's certainly a leap; and obviously one I'd like to mitigate against.

Anyway, many thanks for you advice/thoughts/experience...as ever, more would be welcomed.

Still pondering, though wondering if a 1 bed flat in London would be a better investment than house(s) more local to me....

On that bombshell...

I'd be wary to be getting into an asset class just as the herd is leaving (and the smart money left long ago).

I too think property is a sitting duck for taxation. I mean they've screwed every penny out of everything else and the deficit is still growing - so I'd give it under 2 years before there is a serious land value or property tax.

As for the 'government will do something' line - well they've already shown that they are only doing stuff like QE to help their pals in the city, once the banks balance sheets have been buffered with tax payers money sufficiently to prevent them going tits up at the merest sniff of falling house prices - the market will be allowed to fall. They genuinely don't care about the 'homeowner' they care about the mortgaging banks!

Have you thought about investing directly in a productive economic asset (rather than rent seeking and being a drag on the economy, yes some small percentage of folks will always need to rent but the vast majority who rent today are priced out, primarily by their landlords and do not want to be renting).

My most productive investments are in the green energy sector (my pension was heavily weighted to these as I worked in the industry and saw the massive potential) - and I'm still seeing double digit growth each year even in the recession. And there is no agro from tenants squatting or not paying rent. Much less stressful. I'd be more imaginative to be honest. BTL's time seems to be passing - jumping on bandwagons late is always risky. Look for the next big thing. I can't help but think that elderly care might be a good punt. Hell they've been farming young people for so long it's only fair to farm them eh?

Agree with YW. All the 'tricks' have been done and tbh labour were more intent on keeping the whole thing going than the tories. Historically low IR and QE have literally stopped the shit hitting the fan but they will stop eventually and then I think there will be trouble. If you have plenty of cash and are in it for the long term then maybe but I know a lot of landlords via work and those who were in it for amassing capital quickly in a rising market were all out by xmas. I think thats why they are relaxing planning laws as well in order that a large % stay put and work with what they have so that as prices fall it won't matter to them. I know a couple of agents too and they say most houses on their books are perilously close to negative equity and will have to let as they can't drop with out losing out. It is not worth it if the margins are tight.

OK.

I expressed my thoughts on BTL and in effect property as an investment asset class earlier (BTL - prime target for taxation and housing overpriced without massive wage inflation).

From your candid layout of your finances I would say that you are already exposed enough to housing - you have 80k left outstanding on a 2011 valued 400k property. Your selling price in 2012 already might be around 10% lower than that, or it may not - who knows.

This is not financial advice - it's just what I would do in your situation.

1. Leave the 12K savings in the highest interest rate instant access account you can find. That is a good emergency buffer for a family. I'd try and get that up to a year's worth of cash, but some is better than none.

2. Pay off the 80k mortgage as fast as possible whilst interest rates are low.

3. Ditch the stakeholder pension, and get a SIPP (Self invested personal pension). Lower fees and complete control - you can invest in anything traded on exchanges. You say you distrust city boys - good! Distrust IFA's too - they are commission junkies. But....DO get interested in following financial markets to a degree. And remember that the markets are rigged!

4. Then diversify the funds in the pension. Allocate no more than 10% to any given sector, and rebalance as necessary when sectors overheat. Use ETF's - exchange traded funds as opposed to mutual ones. They have low fees, and most passively track indexes like the FTSE, or even can hold physical commodities or precious metals and gilts.

5. As someone else said, don't concern yourself with your children's debt. I would concern yourself more that they do the right thing for them. I found University to be a complete waste of time, despite going to a Russell Group uni and getting a very decent degree in good subjects. I could have learnt what they taught in 6 months with books - and these days kids have much, much greater access to information and ideas than we did even 15 years ago. What I feel I should have done is used those three years to explore the world of work and find what I excel at earlier. Kids are pushed into making decisions far to young in my opinion - but YMMV :-)

6. Once you've paid the mortgage off, max out ISA allowance and then start dumping money into your SIPP - you will get 40% tax relief at your income level, so for every 100 going into your pension, you only have to dump in 60 quid. That's a nice thing.

7. When the time comes for retirement, look very carefully at drawdown over annuities. The financial parasites want you to buy annuities - but they almost always work out in their favour. Going into drawdown increases the chances of it being in your favour. Do some reading.

At the end of the day, you could choose to put all your eggs in the property basket with another buy to let - up to you. But know that there are more options. They involve work, but don't kid yourself that being a landlord doesn't either. If you have so much money that property is now forming a small part of your overall portfolio, and you feel that the returns are worth it than fair play.

Writing this out has been quite cathartic - I know what I need to do too, follow my own advice. But I'm lazy.

I agree with Cheryl and RCheshire. Get a SIPP and you can make your own investment decisions through that. Take advantage of tax relief on pensions, it may change. You could even start stakeholder pensions for your kids if you want.

Don't forget in 5 years when your eldest is getting ready for uni that higher student debt will be completely normal.

I also am not sure that property is a good bet long term - what is the demographic evidence to support prices ever returning to their bubble heights? As far as I can see the evidence is all in favour of falling prices: i.e.

1. credit conditions have reverted to more sensible lending criteria now the city boys can't flog CDOs and packaged mortgaged debts on the markets. i.e. banks are only lending to those likely to repay them and on sensible LTVs - this wasn't the case during the bubble.

1. the biggest generation (and the richest - 40% of whom have a second house or BTL) this country has ever seen is in the process of retiring and downsizing and within 20 years will be tottering off it's mortal coil. Their property seems likely to be spent paying for their care, in any case there is no one following behind able to afford to buy their houses at the prices they expect.

1. the generation following them is far smaller, poor, indebted, has low job security and in many cases can't even afford to have kids let alone buy a house - how are they going to keep property prices high? Property will be a glut and demand will be low.

1. the country is in recession and wages have been stagnant for 10 years.

1. the coalition is in the process of loosening planning terms and supporting new build houses / the big builders - this will further drop the prices of our housing stock.

On the other hand what evidence is there that BTL is a good bet - the fact that it was once in the past? What is it that the city boys say about an investment 'past performance is no evidence of future profits'.

I think prices are going to fall sufficiently that your children won't need the bank of Mum and Dad to get on the ladder by the time they are young adults and ready to buy - and good for them. Those I know who got parental support have found it really hard and infantilising to have to ask for handouts (and the meddling / emotional attachment that goes with it) - they would much rather have been able to buy without Mummy and Daddy.

People with large cash sums are in a position to get a good deal(20% off minimum) and with record low IRs on savings a house is a reasonable return on your money esp student lets and hmo,s. These are the only people i know holding on. Prices will fall and I don't think we will ever see a bubble like the last 10 years again. August had the lowest mortgage approvals in 20 yrs as banks just won't take risks.

The only downside of focussing on student lettings of course being the falling numbers going to uni as the debts put off the more borderline / mediocre students who just went anyway over the last five years (because everyone else was), but for whom uni really isn't the best option now it'll cost them so much. I doubt there is much room in the market for new players in terms of student lettings and indeed many existing players are likely to get forced out as numbers fall. Crap unis are already seeing big falls in the number of new students. I bet landlords in those towns are not happy bunnies.

The other big rental market has always traditionally been migrants. If the tories do get tough on immigration (and I think in a long drawn out recession, whoever is in power is likely to use migrants as a scapegoat and cut numbers allowed into the country), or if our recession lingers and economic migrants head home (I'm half Polish and my Polish cousins have all gone home as the UK just doesn't stack up financially for them anymore) - there is another market for renting disappearing down the swanny.

Having a business that would then essentially, just be based on providing accomodation to the priced out - would be hard to justify - as long term, they won't be if the demographic trends above play out.

The student market here SE is booming. The monthly return is the big draw.

Ahhh well so long as that continues (fees only started this year, no?) it seems the key is to target the right area. I do wonder how many folks are sending their kids to uni with the assumption that HPI equity will cover the fees - in a falling market will Mummy and Daddy feel so flush and comfortable with taking on so much debt?

Obviously if you target somewhere in an area not local to you then that adds its own costs and difficulties in terms of management.