Should we take the leap to buy-to-let?

[AlwaysOneMissing]

We are currently in a house we love, as our family home. We'll stay here for a long time, while our DC go through schooling.

My DH who is by far the main earner in our household, has no pension provisions (I know I know!!). We are starting to worry about this and feel that we need to be proactive in sorting something. After hearing so many horror stories about traditional pensions, we are thinking of a buy-to-let property. We don't need a monthly profit from it (though it would be an added bonus!) but we are thinking more of a long term investment.
However, we are a bit scared to make a decision with the economic climate as it is. We are scared that we will put a lot of savings and earnings into this, then may get into financial difficulty as a result, and will be in a mess.
But we are also reluctant to just wait around deliberating forever as we need an investment to start building up a pension pot for us, and obviously the sooner we do this, the more lucrative it will be.

So I suppose I am asking have any of you done this? Did it feel like a leap of faith, and did it work out ok?
Any advice for me?
Thanks.

I suppose the questions are: how old are you (ie, how much time have you got to build up an alternative pension pot?); how much do you know about property (have you bought and sold before to make a profit rather than to use as a home?); can you afford to buy in a rentable area; how hands on do you want to be (contracting it all out to agents ends up eating into any income); can you cover any shortfall if tenants don't pay/there is a problem with the property that makes it unrentable for a while etc; will you be able to get a BTL mortgage (minimum 25% deposit, 35-40% preferred for the good deals).

I've done it a few times and it hasn't felt like a leap of faith but I have always bought wrecks that need a lot of work so have sort of built in equity to them in case of a downturn (which hasn't really happened in my part of London - yet). We've only once had "bad" tenants, our very first tenants in our very first BTL and fortunately we managed to persuade them to leave before they fell into serious arrears. We let and manage our properties ourselves and so far, (ten years plus), it has been fine but when something does go wrong, it is time-consuming and slightly irritating (even though it shouldn't be because things do go wrong with houses and appliances...).

Thank you lala, in answer to your questions, we are both 30, and comfortably afford our lifestyle and outgoings at present.
We have no previous experience of property apart from 2 houses that we have owned and lived in (our first house was a doer-upper so we know how expensive/unpredictable it can be).
Once we have saved enough for an adequate deposit, I think we will be able to afford somewhere in a desirable Market town in Cheshire which is commutable to Manchester so we think it is a good area to invest in.
We have enough savings at the moment to cover about a 10% of a deposit so we would have to keep saving before we could make a move (would probably be in a position to do during next year) but then all our family saving would be sunk into this and improvements to our family home would have to wait (new kitchen and bathrooms).

I have done the sums for 2 different properties, one ready to let, the other needs full modernisation first. They both produce a yield of about 4% (is that enough?!) and barely cover the mortgage payments. But the run down one would give us good equity as it would increase in value by around 70% when modernised.

4% is not a great yield - I try never to go below 8%. If you can only just cover payments for mortgage while rates are this low, you may struggle when they go up unless you fix for several years (rates to do this are generally pretty punishing though).

As you are both pretty young, I think there is loads of time for a conventional pension. Perhaps you should post this on money matters or speak to someone in RL about your options.

Thanks for your advice, it really is appreciated.
It seems almost impossible to get near a higher yield, Is it because we are looking in the wrong area or at the wrong properties?
When we look for cheaper properties, the rent they will fetch also goes lower so the yield always stays low. Is there something we are missing!?
Just to check I am calculating yield correctly, is it the price that you paid for the property that you use, or the current value of the property?

I have just purchased my first BTL property as a potential pension provision as I'm self employed with no pension (DH has a final salary company pension).

Although this is my first BTL it hasn't felt like a leap of faith (so far!) as I have renovated for a profit before and worked as an estate agent for 10 years so know the market in the town where I have purchased.

lala has given some great information and I would also agree that if the rental will only just cover the mortgage payments then that particular property is probably not the right one (don't forget there will be additional costs such as insurance, letting agents, gas cert, EPC and any empty months)

If the second property could be improved and increase in value by 70% why not do that and invest the profit?

Thanks DigWeedSow, it's good to hear from someone else who has done it too.
I did consider what you suggest, buying the second house, modernising it, then selling for a profit, but I suppose as that was not our original plan, I was trying not to get distracted! But I should probably be more open minded about our course of action as a good investment is worth jumping on even if it is not what we had originally planned!
We don't actually have the funds to modernise the whole property at the moment, so it might mean it is dragged out, or we have to borrow money to do it quickly, which is obviously more costly. So we'll have to have a think about that.
Thanks again both of you, this is making me think of things I considered before.

You haven't mentioned other savings/investments?

For property, if you're not looking at a great rental yield then you are dependent in the property significantly rising in value. (Like any investment), no-one knows what will happen to property over the next 20 years (soar like the last 20, float around current values, fall heavily on the back of IR rises/a building programme like Ireland's - no-one knows).

With that in mind, if you look at property I'd look at it as a component of your investment portfolio planning for retirement - rather than all eggs one basket.

I have no money in property currently so am split between current accounts, cash isa, equities, corporate bonds. When we find a house it won't replace all that set although will obviously make a decent dent in the others!

Of course I know nothing about your figures but a buy to let in Cheshire just feels wrong to me.
have you looked at student let's or one bed lets? the person I know here in Glasgow doing the best is letting one bed flats on only OK areas for £450 a month. She does the minimum to them. she has great yields. this includes ex LA housing.
Tower block flat, cost 40k now 10% plus yield. That's what you want.

I rent in Cheshire ;)

I think you would have to be a very brave person to think about BTL just now. The "property market" (I hate that term) is in turmoil and whilst I'm not an expert by any means I think it will be flat for a long, long time to come.

This would be good news for lots of people.

Prices coming down by 30% would be better for the nation.

So, No, I don't think BTL is a good idea at the moment.

Have you considered commercial property? You can own them in a SIPP giving you tax breaks that you can't get on residential property. Although they tend not to rise in value so much yields tend to be much higher (10 to 15% not unusual). This gives you cash to invest in other things thereby spreading your risk.
I have a commercial property in a SIPP then invest the income I. A WRAPP when I started this in 2008 my pension pot was worth £35,000 at valuation in April this year it was worth £137,000. Plus I probably won't need to buy an annuity as rent will provide my income on retirement so will be able to bequeath property to DD as her pension.

Oh wow, thank you for all the advice!!

RCheshire at the moment I have a public sector pension but as I work (very) part time, and will not be working much for at least 10 years while our DC are little, my pension will really suffer. My husband has no sort of pension provisions whatsoever, Nothing from his employer either. He is really wary of traditional pension policies as he has heard so many bad stories of people losing out that he doesn't trust them. We would prefer to have matters in our own hands and invest ourselves (our long term plan was a small property portfolio).

7to25 that's really interesting about your friend, maybe we have been considering the wrong properties. Why do you feel a property in Cheshire might not be the right purchase? Is it better to buy in cheaper areas? We had considered buying at very low prices in cheaper areas, but then we worries that we may get unreliable/undesirable tenants who cause us problems. Has your friend never found this?

ElizaDay we thought that by BTL now, we would be benefitting from the poor housing Market, as prices are low and we could get a lot for our money at the moment. Also, as people are finding it harder to get on the property ladder they are renting for longer so we thought it would be easier to find tenants. Maybe we are wrong in thinking this then?

Lonecatwithkitten no, we had not considered commercial Property at all. With the economy the way it is and local businesses struggling and some closing, it makes me wonder if that would be a bit risky? Also I don't know what a SIPP or WRAPP is

RCheshire the only other investment we have is the mortgage on our family home.

My friend is a really hard headed business woman, I have learned a lot from her. She takes up all references and doesn't take any nonsense. to be totally honest, another friend doing upmarket executive lets has far more trouble/hassle from her tenants.
She does not try to make her properties beautiful or in any way try to "own" them. Think estranged husbands as a client group. Hers are the "dingy flats" they are living in!

Before you do anything you really need to get knowledge about different types of pensions the tax relief you can get on the different types etc. You need to look at lots of different types of investment, you need to consider your own personnal attitude to risk. In general the greater the risk you are prepared to take the bigger the likely returns, but there are ways of making calculated risks. Certain types of business are fairly recession proof and having a commerical property for one of these types of business is where I am. Think doctors, dentists and vets. Commercial lets tend to be easier to manage compared to residential. Plus once you have a tenant on average they stay for longer.
You need to know a lot before jumping like this the best place to start is devouring the weekend money sections of the broadsheets.
If you don't know enough and try any of this you will make expensive mistakes and then you are probably better putting your money in a traditional pension.

Lonecatwithkitten I am beginning to realise that you are right and that we don't know enough about our options yet. We will research what is available to us before we commit to anything. I would have never even thought of a commercial let to a doctors/dentist etc so that's something to look into.

7to25 it sounds like your friend really knows what she's doing! I need to take a leaf out of her book. I will admit that the properties we were looking at initially were quaint desirable properties that I wouldn't mind living in! That's probably where we were going wrong.

I will have a chat with DH and we will reconsider our options.

Thanks again everyone for replying

I have had residential property before, but now only have commercial. If you do buy to let it should be total head decision. Proximity to transport links, proximity to town, easy to care for (tenants are not great with gardens). Approx 10 year old 'Lego' type properties on large estates are usually the ones that let easily.
Spend hours looking at to rent section on right move to know your market look at what commands the highest rents relative to their purchase price.
Building a property portfolio is about gearing - that is getting just the right amount of money as a deposit to make rent and mortgage balance. You need to research the tax implications both income tax on the rent and capital gains when you come to sell. There is an optimum time to keep a property from a CGT point of view and this all needs to be in your business plan.
Yes in the late nineties and early noughties people bought properties and made money easily without thinking about all of this, but in truth most of the them rode the market and didn't do anything clever.
Now you have to be clever to make it right.

Always, 4% is a terrible yield - please tell me this is net i.e. after tax, maintenance, LA fees, opportunity cost in terms of lost interest on deposit etc?

Couple of things to consider:

1. You'd be putting all your eggs in one basket, which is pretty much the opposite of what any financial advisor would suggest.

1. The vast majority of people significantly underestimate renovation costs and with property prices falling in much of the country, can you be sure how much you could add to the value?

1. Cuts/caps in Local Housing Allowance are still being rolled out - this is likely to accelerate with the introduction of Universal Credit. Essentially, this means that there will be a smaller pot of money chasing the same number of rentals and this will affect all rent levels, regardless of whether or not you are planning on targeting LHA/HB tenants.

1. What happens when interest rates start to rise (and at some point they will)? Given that most commentators attribute the lack of steeper property price falls to rock bottom interest rates, when rates go up (or indeed when lenders decide they've had enough of forebearance) then its hard to see how price falls won't accelerate. If you could only just clear a profit now, how will you feel subsidising the mortgage repayments on a depreciating asset in years to come?

Don't get me wrong, I'm not against BTL in principle - it just doesn't make a lot of sense at the moment (although I'm sure many would disagree).