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    Dear James: should I invest my savings in buy-to-let?

    9 October 2019

    I have just had an unexpected windfall of £50,000. I’m considering using it to invest in buy-to-let but have been somewhat put off by all the government intervention in the housing market. What would you do with the money to ensure a long term return?

    Under normal circumstances, whenever you have a chance to invest in real estate, I’m in. But these are not normal circumstances. Politics and political direction are all over the shop. Technology is disrupting in ways we never thought possible. Our financial systems are under the most incredible pressures and who knows whether we will be out of the European Union with a deal. And then there’s tax. The tax system has historically favoured the landlord. So has the legal system. We all know that’s under pressure too. The generational issues and tensions being thrown up by a market that’s not functioning well could lead to supply issues and unprecedented intervention by government.

    Investing in real estate isn’t a no-brainer for all anymore. So, you have to work out if your financial position is right for you to take the plunge.

    Have you got full pension and ISA savings? If you do, or have other substantial savings, then now may well be the time to think about a buy-to-let investment. And whilst you may wonder why you’d even consider such a step given the context in which I have put the market. It’s exactly because there’s this uncertainty that in fact there’s a great market opportunity. Sellers are keen to sell. There are deals to be done and don’t be afraid to low ball an offer. However, there are some really important matters you need to consider if you are going to proceed.

    1. Rentability

    A house or flat to rent is a very different prospect from one to live in. Each bedroom needs to be of equal quality if it is to be multi-let. Families may well let but with only £50k as a deposit, you’d be better off catering to the emerging student market or young professionals rather than trying the family homes which do come in at a premium. Either have a budget to decorate or make sure walls are white, bathrooms really functional, common parts and exterior tidy and interior inviting. People often take decisions on rental properties based on shared spaced, the kitchen, for example. Is there a nice table to sit around? Space for a decent sofa around the telly?

    2. Tax

    The joys of property ownership have layered way more tax than was once expected. Stamp Duty will be 3 per cent higher for a second (or more) property. It’s a pain but at lower price levels it shouldn’t be a deal breaker. Don’t forget that there will be income tax to pay on the net rent, Capital Gains Tax on any appreciation of your asset (after allowances), inheritance tax if you leave the asset to anyone (but then who cares, you’ll be dead).

    3. Everyone’s a property expert

    Whatever you do, don’t take specific advice from people who are not qualified to help. Seek separate tax, legal and property advice. And that includes assessing the market. Be careful when you do your numbers and calculations since you’ll be expecting to receive rent but remember to net it down. Ensure that you can afford to pay off the debt if the property is vacant for a few months if one tenant should leave. It always takes a while to find your new tenant. Make sure you factor in management and do listen to experts in the rental market as to what will make a rental property fly.

    4. Traditional letting doesn’t always produce the largest income

    Although there are Airbnb restrictions, it is worth considering what the market is for such a property. You may find a limited letting on such a site nets you more revenue than a long term let. In essence you should be working your way back from the costs, return expected, maintenance and management in order to take your decision. After all, this is an investment not a fashion statement.

    5. Location is still king

    Market timing, tax planning and interest rates are all very important to making your investment sing. Never forget, however, that a good property in a good location with great amenities will always let first. No matter how bad the market. Similarly, well located and specified properties that are neatly presented again will provide dividends. What sings for an owner occupied property and one for the rental market isn’t necessarily the same thing. Be careful to work out what you’re really looking for and how best to apply taste and décor to an asset.

    6. Finance

    Clearly you are not going to be able to buy a property for £50k. That means taking on debt. You are unlikely to get more than 75% LTV and nor should you seek it. Don’t over leverage your asset. Even though interest rates may be low, the increased costs associated with property and tax on your income mean you’ll need to get your equity to work harder. Interest rates are low but really work hard to find the best deal since buy-to-let mortgages are in far shorter supply than they once were.

    So is buy-to-let a good bet? If you put your money into a fixed interest bank account, you’ll be lucky if you get better than a 1.5 per cent return. Even with all the tax, hassle and risk a property will do better. And, if you buy into this turmoil, there’s no doubt in my mind that longer term when clarity returns to our markets, it will be a good income related asset and a good capital investment too. But remember this is a long term play and a longer term investment. And also plan for the worse by ensuring you have some cash on hand to pay for unseen vacancies or service the debt should you be without a tenant.

    As for the impact of government on property, even though some politicians may call for second properties to be taxed at a higher rate, they won’t want to collapse the market in spite of their rhetoric.

    James Max presents the Business Breakfast on TalkRADIO every weekday morning from 5 – 6.30am, is a business consultant and a qualified chartered surveyor.

    @thejamesmax