Bricks and mortar is often an attractive investment idea for many British people.
Property is something you can feel and touch, and many of us have heard stories of people who have made fortunes out of it.
Yet, is property always a good investment? Buy To Let (BTL), in particular, is an interesting topic in this respect. After all, it’s one thing trying to make money out of a property which you own outright. However, doing so on a property which you only partially own – whilst repaying the rest via a mortgage – adds another important element to the equation.
In this article, we’re going to take a look at some of the pros and cons of BTL, recognizing that property can form an important part of an investment portfolio in particular situations, but it should certainly not be your only investment!
In most cases, property should not form the majority or exclusive composition of your investment portfolio. In general, it’s better to diversify your investments across different asset classes and investment types, to spread out your risk and maintain a steady level of growth in the long term.
Please note that this article is for information purposes only, and should not be taken as financial advice. For advice and consultation into your specific financial goals and circumstances, please contact us to speak with a member of our team.
BTL: Pros & Cons
Suppose you have £40,000 in cash. What should you do with it, if you are looking to invest?
One idea might be to put it into a pension. Another idea, however, could be to use it as a deposit on a BTL property. From there, you can use the rent from your tenant to pay off the mortgage and make a nice profit on top of it.
It sounds straightforward and appealing in principle, especially to those who like the idea of being a property mogul! However, BTL is not straightforward and there are significant risks to be aware of – meaning you should not dive into such a commitment lightly.
Here are some of the pros of investing in BTL:
- Potential long-term growth. Historically in the UK, overall, house prices have risen over previous decades. Of course, house prices go up and down but, generally speaking, they usually go up in the long-term. That means you could potentially sell the property at a profit in the future, once the mortgage is eventually paid off.
- Income in the immediate term. With BTL, the rent from your tenants will exceed your BTL mortgage payments (the lender will not lend to you otherwise!). That could be a nice extra source of income on top of your salary and other income sources.
- Tax advantages. There are certain areas where you can offset the costs of your BTL costs against your tax bill, such as property repairs and fees to letting agents.
Here are some of the cons to consider:
- Profit-eating factors. In a perfect world, your BTL property would always have a paying tenant to cover the mortgage, and there would be no unexpected costs. In reality, however, there are often times when your property is empty, meaning you need to pick up the mortgage bill yourself. There are also times when you have expensive repairs to cover, such as a broken boiler or roof. These costs can amount to thousands of pounds and can, therefore, eat into years’ worth of your rental yields.
- Interest rates. In early 2019, ‘interested parties’ are pointing to or promoting some relatively attractive deals for BTL mortgages. However, interest rates are not static and there is a strong possibility they will rise in future years. Indeed many BTL landlords are now faced with significantly higher replacement mortgages as they come to the end of the original terms. Your finances need to be able to cope with this.
- Increased taxes. BTL landlords are at the mercy of government policy, which often changes and can seriously eat into your profits. A recent example is the change to interest rate tax relief for BTL mortgages, which has led some landlords to lose thousands of pounds in the form of extra tax.
- Liquidity. We all know that buying and selling houses cost money in terms of surveys, legal fees, Stamp Duty, arrangement fees etc. We also know that sellers sometimes have to drop their property price to attract buyers in slow or difficult markets, so care should be taken to weigh these additional cots up.
Other options for your £40,000
Is BTL your only option when deciding where to commit a lump sum of, say, £40,000?
With the help of an independent financial adviser, you could invest it in a range of assets and spread out the risk. For instance, putting it into a pension (e.g. over two years) offers the chance to grow your lump sum significantly over two or three decades, due to compound interest.
There’s also a big tax advantage as well since the government will put an extra £25 into your pension for every £100 you put in, up to £40,000 or up to your annual salary – whichever is lower (assuming you are a Basic Rate taxpayer).
Putting your money into a pension also offers some important risk mitigation. When you commit the full £40,000 into a BTL property, for instance, all of the money is tied up with the fate of this one property and also the fate of the wider property market.
If you put it into a pension, however, and invest the money across different asset classes then you are effectively putting your eggs in several baskets. If one or two of these “baskets” (investments) do not perform so well (such as some of your equities), then the others (e.g. your bond investments) can help support you and protect your wealth until the market improves.
Conclusion
BTL can sometimes be a good investment for people who understand the risks they’re getting into, and who have planned carefully for contingencies which might eat into their profits.
For most people, however, you are probably better off thinking about other ways to invest your money. If you are keen to invest in property, then there are other options you can consider outside of BTL, such as Real Estates Investment Trusts (REITs).
Speak to an independent financial adviser today to discuss your options.
