Patrick Roach
A hard look at Buy to Let
It seems that everyone today is either already a buy to let investor, or trying to become one. As a nation we appear to regard property as a passport to riches. Between the start of 1999 and the end of 2004, the number of buy to let mortgages climbed from 59,000 to 526,000, on property worth £52.2 billion
Recent years have certainly shown tremendous capital returns on property investment, but common sense indicates that this is unlikely to continue at the same rate. Remember the falling property market in the early 1990s. Prices have leveled. Rents have dropped in many areas, due to over supply. Just one or two months without a tenant can cause serious financial pressure on a landlord with mortgage payments to make.
How many landlords actually calculate the rate of return on their rental property? Assuming a property worth £150,000, fully let, no void periods, for £500 per month, the gross yield is 4%, which is taxable, bringing yield down to nearer 3%. Acceptable when there was capital growth in addition.
Given time, nearly every landlord will have at least one horror story, if not more. Void letting periods are bad enough, but are insignificant compared to the non paying and/or destructive tenant and the endless re-decorating on change of tenant is tiresome.
Maybe now is the time for landlords to realise their gains by selling and look for an alternative investment. Whilst often dismissed due to reluctance to pay Capital Gains Tax (CGT), this is frequently much less than feared. Costs of purchase, agent’s and legal fees and improvements (not repairs) all reduce the gain, as does indexation and taper relief. Each individual currently has an annual allowance of £8,500 to offset against CGT. Jointly owned property has two CGT allowances - £17,000. The remaining chargeable gain is taxed at your marginal rate of tax. Many believe incorrectly that all CGT is payable at 40%. Non or basic rate taxpayers pay CGT at 10% and 20% and only at 40% when their basic rate tax band is used up. Be careful though, taxation rules can and do change.
Future investment can still be involved in property, but as a small part of a much larger concern. Commercial property is beyond the means of most private individuals. Retail shopping parks, warehouses and offices represent a sector where the tenant is often a household name and a blue chip company. Most insurance companies offer access to Commercial Property Funds with yields averaging 8% pa. Hassle free investment, for either growth or income that can be arranged tax efficiently. No more telephone calls from that tenant on a Sunday evening about the dripping tap or blown fuse!
Investing in buy to let property should be carefully considered use our contact page to request a free no obligation discussion about your options.
Not all Buy to Let mortgages are regulated by the Financial Services Authority and Commercial mortgages are not regulated by the Financial Services Authority. If you do not keep up your monthly repayments on your mortgage your home may be repossessed.