27 March 2015, The Times
How can you make your pension pot money work its hardest? Investing in a rental property is a popular option. According to the insurer Direct Line for Business, about a third (32 per cent) of people aged 45 to 64 who have a pension would consider investing some or all of it in a buy-to-let (BTL) property.
Their thinking is that a bricks-and-mortar investment is a third way between the rock-bottom interest rates on the high street and the volatile stock market, and estate agents report a stream of would-be “silver landlords” coming through their doors. But BTL isn’t an easy option. Before you start house-hunting you need to grasp the tax implications and risks involved.
Is BTL a good idea compared with other forms of investment?
A recent study by the finance services group True Potential concluded that, over the past 30 years, shares outperformed property. Cash investments produced the poorest returns. However, fear of stock market volatility has deterred some investors who feel that investing in something they can see is a safer bet, even though capital growth is not guaranteed. “All investments include some risk,” says Alan Ward, chairman of the Residential Landlords Association.
“If you are looking for capital growth, you have to remember that a lot of property has not regained the value it had prior to 2008.”
Am I landlord material?
House-hunting for a BTL property has to be a clinical process — you need a property that will appeal to the market, not one you adore. “There can be a lot of emotion involved,” says David Vawdrey, branch manager of Leaders letting agency, in Chichester, West Sussex. “You have to be slightly divorced from the property; it needs to be something that will let well, not something you want to live in.”
You also need time to spend on the property, even if you have a managing agent. You will need to field regular calls about maintenance issues — and it is your legal responsibility to ensure the property is in a decent, safe condition. However, Vawdrey’s biggest issue is landlords who hope to BTL on a shoestring and have no contingency funds in place. “An agent’s biggest nightmare is when the boiler breaks down and you have tenants screaming and the landlord saying they can’t afford to fix it,” he says.
What sort of property should I buy?
Flats are the traditional choice of BTL landlords. “They are much easier and cost less to maintain,” says Will Clark, director at sellmyhome.co.uk.
“Two-bedroom flats tend to be the most popular with landlords as they appeal to a variety of potential tenants — from couples, singles, young families and downsizers.” A flat close to a train or Tube station, university, or city centre will tend to be the easiest to let. However, buying a house to let might be a smarter option, as more young families are priced off the property ladder and face renting for life, in particular in London and the southeast. Families tend to stay put longer than young renters, meaning less risk of void periods.
Should I look for an income or growth?
According to the Direct Line for Business survey, more retirees want a property that will deliver a regular income (43 per cent), compared with those seeking capital growth (17 per cent). Finding a property that will deliver both will be challenging.
“Areas either give good capital growth or good income. Combining the two is very hard unless you buy a wreck for cash and add value, then remortgage,” says Kate Faulkner, managing director of the property advice site propertychecklists.co.uk.
The golden rule is that if you buy an inexpensive property in a depressed market your yield (see below) will be higher than if you buy in an expensive area where the higher rents will be wiped out by higher entry costs. Tim Hyatt, at Knight Frank, says that investors should look for a minimum 5 per cent yield to break even, once maintenance, service charges, fees and tax are taken into account.
Does it need to be near where I live?
A recent study by Sequre Property Investment reports that 61 per cent of investors buying property in the north of England are based in London or the southeast. These buyers are homing in on good-value locations such as Manchester, Liverpool, Preston and Salford, where entry prices are low, and Sequre suggests they can enjoy yields of up to 7 or 8 per cent — almost twice what they would earn on a property in London. If you do rent far from home, a good local lettings agent will be a must and that will eat into your profits — of which more later.
What is “yield” and how do I calculate it?
Yield is the income you can expect to earn from a BTL compared with the value of the property. So, if you spent £225,000 on a property, rent it out for £950 per month (or £11,400 per year), your yield would be 5.06 per cent (11,400 divided by 225,000 times 100).
However, calculating a precise yield is not quite as simple because there are some wild-card costs to consider. Terry Lovett, managing director of Lovett estate agents in Cambridgeshire, points out that yield does not allow for periods when the property is empty (a “void period” in the trade) and the cost of management and maintenance, although these latter costs are tax deductible. Another issue with yield is that it is hard to predict in advance. Faulkner warns that unregulated estate agents can say whatever they like on returns (unlike financial advisers) so do your research on local rents before you buy.
What is the BTL mortgage market like?
Good, says Brian Murphy, head of lending at the Mortgage Advice Bureau. “We have not had so many products in the market since before the financial crisis,” he says. The minimum deposit you can offer for a BTL mortgage will be about 15 per cent but, of course, the more money you put down the better your interest rate will be. If you have, say, a 40 per cent deposit you could expect to find a tracker mortgage with an interest rate of about 2 per cent. If you opt to fix that mortgage for two years then that will rise to about 2.3 to 2.4 per cent.
However, Murphy suggests that, before plunging in, you consult a specialist pensions adviser. “One size does not fit all,” he says.
How do I go about finding a good lettings agent?
Word of mouth is the best way. The Association of Residential Letting Agents (arla.co.uk) and the Royal Institution of Chartered Surveyors (rics.org) have databases of members. Find out who your point of contact will be, exactly what they will be doing for you, and how much it will cost — including whether they will charge fees each time a tenancy agreement is renewed, a common ruse.
Speak to several firms before making a decision. Check that they are registered with the property ombudsman, which can arbitrate if you do run into difficulties (tpos.co.uk). You could even go under cover. “Mystery shop them,” advises Karelia Scott-Daniels, of Manse & Garret Property Search. “Sign up as a tenant and see how they treat you. If they just refer you to their website they are not being very proactive. They should be persuading you to go and see things.”
How much will they charge?
The cost of marketing your property initially varies wildly, says Ward, but it is about half a month’s rent. He says it is crucial to grill your agent on matters such as the cost of renewing a tenancy so you don’t get a nasty surprise further down the line. Expect to pay about 10 per cent of your rent for day-to-day management. However, this will be higher in London — Faulkner suggests it could be about 15 per cent.
Remember, however, that the cost of management is tax deductible. If you want to cut costs, do it yourself — advertising a property on a website such as Gumtree is probably the most cost-effective method, although you will have to interview tenants yourself and call in their references.
Unless you have experience of BTL, or are unafraid of the learning curve involved and willing to put in several hours each week, Faulkner thinks it is best to leave the job of managing a BTL to an agent. “The management of a property is complex. I use an agent as it’s virtually impossible to keep up with the law,” she says.
Buying agent Camilla Dell, partner of Black Brick, agrees. “It’s never a good idea to manage a property yourself,” she says. “What happens if you are away on holiday and your tenant calls you in the middle of the night complaining of a leaking tap? A good agent acts as a barrier between you and your tenant, so if things get tricky, the emotion is removed and problems can be dealt with in a calm, professional manner.”
What red tape will I face if I do manage it myself?
Before you rent the property you will need to have an Energy Performance Certificate. Gas appliances must be safety-checked annually and it is advisable that the electrics are also checked (this is not mandatory unless you are renting a large shared house). The property should be in a safe and decent state. You also have to sign up to a deposit protection scheme to safeguard the money your tenant pays up front. Checks on the immigration status of tenants are being trialled in the Midlands and could be rolled out nationwide.