The following is a guest post from Michael Clark and PropertyTurkey.com.
The buy-to-let market is facing its toughest challenge for many years. In what was once a safe and reasonably lucrative investment opportunity is now having its profits attacked. The UK government have introduced a cut to mortgage interest rate relief and added three percent to stamp duty charges. However, despite this there remains a large amount of interest in this sector of the real estate market.
The changes to tax and the additional stamp duty will effectively end the ability for people to borrow the value of a property on an interest only policy with minimum or even no deposit. Simply put, attempting to purchase a property this way will not be affordable; you will suffer a loss! This means that the higher risk route of generating an investment pot will be gone. The initial properties rise in value will be unlikely to generate the additional funds needed to pay the deposit, stamp duty and deal with the mortgage tax relief.
However, this does not mean that it is no longer viable or practical to invest in the real estate market. Certainly if you are a cash buyer and are looking to generate a reasonable income it should be feasible to do so.
Is Buy-to-Let a Good Investment?
Assuming you have saved or come into enough money to purchase a good property for renting, the first question must be whether it will produce a significant enough yield to better other forms of investing. An annual return of four percent on your initial investment is reasonable although possibly on the low side. However, it does prompt the question of whether that is enough to live on and deal with any unexpected repairs or the daily maintenance.
To ensure you can cope with empty periods and unexpected bills you must aim to have at least three month’s worth of money put aside; this will help you to continue trading. Additionally you may want or need to factor in the cost of having someone manager your property. This can be approximately ten percent of the rental income and something you must take into consideration when working out your final profit. Being a cash buyer will give you the best opportunity to make a success of any buy to let undertaking.
The Traditional Pension
Many people still choose to put money into a pension fund and hope that it will build to an expected value. Provided it does they should be comfortable in their retirement. This can be aided by employer’s contributions along the way; something that can double your contribution. If you are a higher rate tax payer then it can be a very effective way to save, especially if you plan to live on less money in retirement than you currently do.
If you are saving for a traditional pension you should be using every possible tax relief opportunity. For example, funds in an ISA will not attract capital gains tax and they will not be taxed when you draw them down. Funds which are not enclosed in an ISA will usually attract a lower tax rate than any rental income you receive.
A pension will start paying out at a set age and your separate investments can be drawn as you need them. If you have tied your funds into a house you may find it more difficult to release the funds if you need them. However, a property should give you an income for life and the potential to pass it on to your children. It’s certainly not the type of investment you should avoid; but then again, if you choose to invest you must do it wisely.
Both routes have their advantages and disadvantages; the decision as to which suits you best must be made according to your personal circumstances. A financial advisor can help you make a decision. Always know this – you can’t mess around with an experienced broker. Due to their experience, they can understand the real estate market better than anyone. Allow them to give you a hand, particularly when you can’t make a decision between a buy-to-let and traditional pension pot for retirement income; this way you’ll take lower risks and you’ll have higher chances of seeing returns.