publication date: Sep 30, 2013
author/source: Kate Faulkner, Property Expert and Author of Which? Property Books
Three Things you Must Check for Before Investing in Buy to Let
On a daily basis, I probably have 5-10 emails telling me investing in property is my route to ‘financial freedom’ or 'it’s a better bet than investing in a pension'. And for some, property might be. But for many, it can be the worst investment you make.
There are far too many companies shouting about the benefits of property investment, when really what they mean is 'please invest in property so WE can get rich'. The reality is, many people I have met that want you to invest in property don’t care two hoots if you make money or not, as long as they profit from your investment!
So three things to think through before you invest in buy to let:-
1. Is it the right thing for you?
Many people I meet want to invest in buy to let to increase the income they receive. Some do this by buying through a mortgage and some with cash. Most investors who buy in today’s market buy with an interest only mortgage and although rates are currently low, check if you would actually earn anything at 7% mortgage rates, or if the property doesn’t go up in value in line with inflation – then as a cash investor you will be losing money, not gaining it.
2. Make sure you understand how people lose money on buy to let
There are lots of ways of losing money when you invest in buy to let. Firstly, the value of the property could fall, secondly, your tenant could trash your house and if the damage isn’t covered by your insurance company, you could quickly be out of pocket by tens of thousands of pounds.
In addition, the costs of running your buy to let may quickly be more than your rent – especially if rents fall. Don’t think this will happen? Well rents fell in Nottinghamshire, for example, by up to 20% in 2008/2009, so they can and you need to understand this before you invest.
And if you are a higher rate tax payer and especially if you earn £100,000 or more, you could end up losing more tax benefits than you gain in rental income if you invest in buy to let – so make sure you consult a financial expert prior to investing.
3. Know your legals and tax position
Very few people compare what property investment will deliver versus financial or other investments. Many invest for their kids' future, but many don’t do it knowing the law or tax implications
. Don’t think you can sign over a property to your children, live for seven years and it’s all theirs tax free – it’s not that simple!
And make sure you know whether you buy a property as 'Tenants in Common', have a Society of Trust and Estate Practitioners (STEP lawyer) check or create your Will and finally, make sure a property tax expert checks out the implications of your property investment on the rest of your financial assets.
Buying to let is not a simple investment, it is one you can do, but to be successful, you can’t just hand over money to a property investment company offering ‘armchair investing’ and ‘no money down deals’ or ‘joint ventures’. I’ve seen far too many of these businesses go bust taking people’s hard earn cash with them!