How to Invest in Property
There’s no denying that back in the nineties and even the noughties, buying a residential property and letting it out had its financial merits. Providing you were in it for the long run and were able to weather the occasional crash, there was a good chance of some half decent returns. The banks were doing there bit to fuel the buy-to-let investment bubble by lending money to anyone that could write their name on a piece of paper. Lending limits on buy-to-let property had no bearing on what you could afford financially – you just had to say in your mortgage application that you were confident the rental yield would cover the mortgage interest. In no time at all and regardless of your financial situation, you could build your very own property portfolio.
But that’s now all changed. The financial crash of two thousand and eight meant banks, reeling off the back of their own greed – no longer wanted to lend and dropped the loan to value ratio on mortgages in some cases, down to just forty five per cent. Some even stopped lending altogether. The market was dealt a further blow in twenty fourteen when new lending rules were introduced. This means that both residential and buy-to-let borrowers now have to prove they can actually afford to pay their mortgage. I wonder who came up with that genius idea? It says a lot about their attitude that this simple concept never even occurred to the banks prior to the financial crisis.
George Osborne’s personal vendetta against private landlords has really tightened the screw on potential buy-to let investors in an effort to find favour with first time buyers frozen out of the market by rising prices. First there was a series of stamp duty hikes on the higher end of the property market and then in April of this year, stamp duty on second homes was increased adding an additional three per cent of the property value to your purchase price. Remember that’s in addition to the stamp duty you’re already paying. Worse still, when you come to sell the property in years to come, you’ll pay even further through a higher rate of capital gains tax than gets applied to every other type of gain.
Then came the infamous section twenty-four where he progressively removed the setting off of higher rate tax against mortgage costs. The legal challenge against these changes failed recently so it looks like the financially illiterate Mr Osborne will leave a permanent legacy as the first conservative chancellor to make it a crime to own investment property in the UK. But let’s say you’re still tempted to opt for the buy-to-let property investment. The market is saturated with the traditional entry point for buy-to-let – the two bed new build off plan apartment. There are hundreds standing empty in parts of London so you’ll be hard pushed to make this work. Then you’ll need to decide whether you’re prepared to actively manage the property yourself. It might save you money in the long run, but do you really want to get a phone call at 2 o’clock on a winter’s morning to go and deal with a burst water pipe? I thought not and that means you’ll need to factor in the costs of a management agency who will be skimming of a healthy ten to fifteen per cent of your monthly rental yield before it even hits your bank. And that’s before they bill you for any repairs and maintenance.
So, if you still like the idea of a bricks and mortar investment, what’s the answer? Houses of Multiple Occupation or HMOs are one alternative offering higher yields for a given size of property as tenants have their own bedroom and share the common parts. These have moved on from the grotty student bedsits of the seventies and eighties and have worked particularly well among young professionals brought up on programmes like Friends.
Commercial property can also offer great benefits like long term passive income and hands-free investment. If you read our Wealth Watch magazine or you’ve visited our website recently you’ll see we have a range of great commercial investments from care homes to theme parks. Providing you stick below the £150,000 investment threshold, there’s no stamp duty to pay. You’ll even qualify for a lower rate of capital gains tax when you sell the property.
Elite Investor Club regular Harry Dent says you should use the Monopoly approach when it comes to property and invest for income rather than capital gain. Commercial property investment gives you an ideal opportunity to do that and many have a built in uplift to the original investment when you sell them back. With the Major of London recently launching “the biggest and most comprehensive enquiry” into the effect of overseas investment on the residential sector, you can expect the residential buy-to-let market to become more challenging than ever.
So if you’re still set on investing in the residential buy to let market… be very careful out there.