Wednesday Wealth Dilemma: Should I invest in a buy-to-let property?
As I mentioned in last week's blog article, I've dipped my toe in the buy-to-let property market before. and it's been sorely bruised. Should I risk it again?
At the fag-end of the 1980s, not long before leaving Bermuda, I jumped onto the buy-to-let bandwagon at exactly the wrong time. UK property prices were soaring, artificially inflated by the imminent withdrawal of double tax allowances for couples, mortgage rates rose inexorably to above 15%, and developers got rich at the expense of naïve buyers.
From our insulated tax-haven, some friends and I bought a shiny new apartment in the Brave New World of London’s Docklands. Rented out through a well-known London agent, what could possibly go wrong? Almost everything, as it turned out:
- Some tenants didn’t pay the rent
- The front door was kicked down by a tenant…. or their friend
- Our agent grabbed 15% of whatever rent we received, but seemed to do little to earn their excessive commission for “total management”
- Along with many others, we were soon in the dreaded negative equity boat
- My friends got divorced and one of them returned to the UK, with the only practical solution being that he bought out his ex and me
Fast forward a few years and it’s amazing what amnesia another housing market boom can induce:
In the mid-1990s I was back in the UK myself and living in a flat in leafy Godalming, Surrey. The development was in the shadow of Charterhouse school-for-the-filthy-rich, within an easy walk of the quaint High Street and the mainline station with direct trains to London.
After a few years of happily living there myself, my parents and I splashed out on a joint venture buy-to-let in the same development… what could possibly go wrong, especially with me on-site to manage the property?
- One of the first tenants was a crazy chef, who worked chef-like hours and would call at any time to complain about the fridge/lights/washing machine/shower not working.
- Other tenants fought cat-and-dog like, upsetting the immediate neighbours who knew I lived within spitting distance.
- From my hazy memory, the investment may just have washed its own face, with rental income covering all costs…. but it didn’t compensate for all the hassle/
- We sold the flat after a couple of years, when my priorities became different from my co-investors. We made a small capital gain…. but not enough to compensate for the hassles.
If Gill & I manage eventually to sell our overseas property, should we reinvest in a UK buy-to-let property or look elsewhere for a better - and hassle-free – return?
Suppose we come out of our French débacle with £100k (of saved equity, definitely not profit!).
With a buy-to-let mortgage of £150k, we could look for a property around the £250k mark. But there will be other up-front costs to fork out….stamp duty (1%/£2,500 on property costing £250k but 3%/£7,530 on £251,000!); mortgage arrangement & survey fees (see below); fire-proof furniture, electrics and gas checks to meet increasingly onerous bureaucracy (and keep tenants safe, of course).
What’s the current expected rental yield? 5% would give an annual gross income of £12.5k, assuming there are no dreaded void periods, with tumbleweed in the property instead of tenants. And then there would be maintenance costs and management fees. A full management fee at 15% of gross rental income would be £1,875.
I’ve just spoken with Tim Wilson, the manager of lovemoney.com’s excellent fee-free and whole-of-market mortgage service. Here are some examples of current buy-to-let mortgages available with a 40% deposit and 60% loan-to-value, if you want to borrow £150k:
- 2.99% interest rate, fixed for 1 year… but with whopping fees of £5,924
- 7.39% fixed for 2 years, but with fees of only £495
- A 4.49% tracker rate, with total fees of £1,085 but no tie-ins
- 4.74% fixed for 2 years, with total fees of £1,085
So if we went with the tracker at 4.49%, our annual interest cost would be currently be £6,735. However, this is sure to rise in the future, as the only way for the Base Rate to go is up.
In the recent Noughties property boom everyone piled into buy-to-let investments, safe in the knowledge that Sarah Beeney was on hand with wise words and that even if you screwed up, there would be a huge capital gain when you wanted out.
Not now. Despite surprising increases throughout 2009, I fear house prices will remain stagnant for a few years while the economy gets back onto an even keel. You certainly shouldn’t assume a capital gain will bail you out of a poorly performing buy-to-let investment.
The verdict… you decide
On the numbers above, we might make a small net income each year…assuming no interest rate increases and full occupancy, and no hidden costs.
Harvey Jones has just come down firmly against being a buy-to-let landlord… but some of you clearly disagree with his view!
For me, the likelihood of making a capital gain is still the most important – and uncertain - part of the equation. Maybe we should just think longer term than I did before… and be patient? And rise above the inconvenience and hassle of being a landlord – because the rewards are worth it?
Please tell me below what you think. And if this has stimulated your interest, go ahead and adopt our become a buy-to-let landlord goal. Or ask a question of fellow lovemoney.com users on our interactive Q&A forum.
“Landlords grow rich in their sleep.” - John Stuart Mill (1806-1873 - another UK housing boom?)
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