Member Article

Buy-to-Let about to get more expensive

As Buy-to-Let landlords brace themselves for higher stamp duty from April this year, margins are thinning and the pros of investing in property are on the wane, say Yorkshire -based financial planners.

If you happen to be a Buy-to-Let landlord, this year has seen little in the way of good news emerge from the Chancellor’s little red briefcase. Back in November, the Chancellor announced a sharp increase of 3% on stamp duty for Buy-to-Let properties and second homes. In addition to this, Buy-to-Let landlords are already due to receive a lower rate of tax relief on mortgage payments - a flat rate 20 per cent tax credit. This means those paying higher-rate tax will lose half of their relief, while some others will be moved up into this bracket and so see their tax bill soar.

Though the mortgage interest tax changes will be gradually phased in between now and 2020, the stamp duty increase will have near immediate effect, entering play in a few months’ time on the 1st April 2016.

Paul Reeves, wealth planning adviser at Gale and Phillipson in Richmond and Northallerton, said: “Unfortunately this isn’t an April Fools’ joke. Whether or not it will help or hinder the economy as a whole, it’s clear that Buy-to-Let landlords will end up with less cash in their pockets soon.”

So is Buy-to-Let still a worthwhile investment? To assess this, Paul says it’s always a good idea to take a logical approach and weigh up the pros and cons compared to more traditional investments: “Managing one or several properties often has costs attached, whether in your own time or through employing others to deal with issues in your stead. Calculate these costs, and add them your cons column so you can calculate the real yield.

“On top of management costs, there are also other additional costs to consider. Solicitors are needed for purchase and sale. Building surveyors are a wise investment to ensure what you are buying isn’t damaged in some way. The list goes on. Make sure you calculate these costs, and add them to your management costs, in order to see your true margins.”

Another factor to consider is your attitude to risk. Paul said: “Unlike with shares or other traditional investments, property is an expensive investment to make initially. A more traditional investment portfolio can be spread among various sources to minimise risk. If a few fail to perform, the overall totals don’t suffer too greatly.

“Property lacks this defence mechanism, as even the smallest properties cost vast amounts of money, and therefore cannot be easily split. What’s more, if all your savings are invested in property, you are at far more risk of changes to the property market than those who choose to invest in other more traditional options that are much more easily liquidated.”

As if the pure financial considerations weren’t tricky enough, Buy-to-Let comes with its own additional level of risk: from the tenants that live there – or not, as Paul points out. He said: “This point is simple enough: If your property is empty, with no tenant, you will receive no rent, and therefore no income. This is especially important if you have a mortgage, as you may not have a tenant, but the lender will still expect to be paid.

“Also, it’s important to remember that property is not indestructible, and will not it fix itself. You will need to regularly hire tradesmen to ensure each property is kept up to standard in order to not only appease your tenants, but also maintain the value of the property.”

Despite the impending changes, with low interest rates and choppy stock markets showing no signs of letting up, demand to invest in housing is still high. There are currently two million UK based landlords, owning 4.9 million properties between them. According to research from Paragon, half of landlords expect tenant demand to increase in the next 12 months, with 18% of landlords expecting to buy rental property over the next three months.

Paul said: “Bear in mind that income from rent isn’t the only way your investment will grow, as the price of the property is often the true Buy-to-Let investment. Although tax relief for landlords will be reduced, one alternative to continue to invest in property is to set up a company to buy property. Although your property has the opportunity to grow in value, equally it has the potential to fall in value. This should be taken in to consideration alongside your other pros and cons when considering which type of investment is most suitable for you.

“Alternatively, there are other, more traditional investment options for people to consider. If anyone is unsure what the best option is for you and your money, you should speak to an adviser.”

For information, factsheets, guides and videos, visit the Gale and Phillipson resource library at www.galeandphillipson.co.uk/resources

This was posted in Bdaily's Members' News section by Gale and Phillipson .