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Financial Planning update: Buy-to-let investments

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3 September 2018

Buy-to-let investments 

According to the Economist, the combined rent received by UK landlords adds up to £55-65 billion per annum. To put this into context, that is more revenue than the likes of Tesco, Shell or Unilever achieved in 2017. 

To the outsider, a rental property looks like an attractive way to make money: you buy a house, you appoint an agent to let it and manage it, then you sit back and enjoy an easy, passive, regular stream of income.

Furthermore, houses are simple: you know what a house is; you know what one looks like, and where you can buy one; you can touch it with your hands and set eyes upon it whenever you feel the need.

Perhaps these romantic perceptions explain much of the appeal of residential property investments. According to the BBC, one in ten adults now own a second home. For many of these people, a vast proportion of their overall wealth is accounted for by just a couple of properties.

There is a good argument for including residential property exposure in a balanced investment strategy: their returns have not historically shown strong correlations with stock markets, so their inclusion should reduce the volatility of an investment portfolio.

The problem is that for most people, the value of their private residence alone is usually sufficient to cater for their portfolio’s residential property needs many times over.

Safe as houses? 

Investment in housing is often seen as a safe bet, and few stop to challenge this received wisdom, but the realities can involve considerably more risk than you might think.

A great deal of risk is introduced by the fact that few can afford to diversify across more than a handful of properties, and this creates a precarious position whereby a small mishap could cause significant harm to overall wealth. Here are a few examples of potentially troublesome scenarios:

  • Your tenant stops paying rent – the income stops, and you may have to fund a court case to get it started again. Your cashflow troubles won’t end there if you also have buy-to-let mortgage payments to consider. 
  • The area in which the property is situated becomes less desirable – planning permission is granted for something unpleasant nearby, or the formerly popular local school falls out of favour, so the property’s value falls at your expense. 
  • You need a cash lump sum – but if your wealth is tied up in property then what can you do? You cannot spend bricks, you cannot sell a bedroom, so the whole house has to go. If you have to cut the price for a quick sale, or if the market isn’t at its strongest, you could lose a significant portion of your overall return. 

Clearly this list is not exhaustive, and nor are these scenarios mutually exclusive. These risks pose a real and substantial threat when a large portion of your wealth is spread across a small handful of properties.

Unpopular up top 

Whilst one in ten adults own a second property, four in ten adults own no property at all. The Government is coming under increasing pressure to help people onto the property ladder, and a crackdown on second property ownership is an obvious part of the solution.

The Government has imposed additional tax penalties on the purchase and sale of properties that are not used as a main residence, plus various reductions in the tax reliefs available on buy-to-let costs.

These measures are already being credited for the slowdown in house price increases. Furthermore, letting agent fees are under the spotlight, as are minimum tenancy periods, and numerous ideas exist to further empower tenants and penalise landlords. With no end in sight to the housing crisis, the crackdown looks set to continue.

Conclusion

The risks of purchasing a buy-to-let property are not trivial, the returns are under attack, and the costs are on the rise. These are not necessary evils: it is possible to manage many of these risks whilst still reaping the rewards on offer.

The question to ask yourself is this: what is it about a residential property investment that really appeals? Is it the perception of low risk? The income? The potential for growth in value? Once you know the answer, you might just find that there are other options available to cater to your needs, with lower levels of risk.

If you would like any help with this then please get in touch, and one of our advisers will happily provide assistance in highlighting your needs and your options going forward.