Why buy to let – if you do it properly – still works financially

publication date: Nov 30, 2015
author/source: Kate Faulkner, Property Expert and Author of Which? Property Books

Why buy to let still works...


I’ve been really surprised at the huge fuss that’s being made of the 3% increase in stamp duty for Buy to let investors and second home owners.

To be honest I think the bigger problem is good landlords are feeling they are being ‘punished’ for a policy that successive governments have pushed for – a bigger private rented sector at the expense of social housing.

Research suggests that 25% of those in the PRS need housing benefit to finance their home. That’s not because landlords are ‘over charging’ or because they have bought homes that would have gone to first time buyers, it’s because there are over 1.4 million on council waiting lists, waiting for social homes that just aren’t being built and worst still, are being sold off. The only other place for these people to go is the private rented sector.

Blaming landlords for the housing benefit bill or letting agents for mostly reasonable administration fees, considering people are ‘borrowing’ a £150,000 to £200,000 asset or more, is ridiculous and just plain wrong.

MPs and local authority planners have to accept the main responsibility of a lack of housing in the UK and stop blaming everyone else for what is fundamentally one of the main things we pay them all for – to put a roof over everyone’s heads.

Reducing demand from buy to let investors just means less properties to rent. Our problem is a shortage of stock across all tenures, most notably social/affordable housing, so it won’t make a difference to the housing crisis. Nothing will until we build enough homes to keep up with our population growth and provide homes to buy and rent at a cost that people’s wages can fund.

Read - Buy to Let Quick Guide

Why the 3% stamp duty change isn’t that bad, long term
Cash flow wise at the start it will make a difference to investors as you have to find the extra money.

But if you don’t have this extra cash available in the first place, you probably shouldn’t be investing. Buy to let requires huge amounts of on-going investment in maintenance such as £3k for a new boiler, thousands for a new roof or windows or covering loss of rent when the property is empty.

And what very few people are reminding everyone is that when you ‘cash out’ your investment, the stamp duty you paid is tax deductible at the rate of income tax you pay ie 20%, 40% or 45%, so the ‘final cost’ isn’t as much as 3%.

Read - Buy to Let Quick Guide

Why the 3% stamp duty may mean investors can secure property at better prices
It is true that when you add the stamp duty change to the mortgage tax relief it will have an impact on the ability of investors to make new buy to let deals stack up.

The reality with this situation is that the changes this year will end up reducing the number of people entering buy to let next year. And for those investors who have just bought properties and ‘let them out’ relying on natural capital growth rather than ensuring the growth is there from the start, they may well sell up, adding more stock to the market.

What this means is a reduction in demand and an increase in supply. So, it’s likely that it will be easier for real investors, who know their numbers well, to buy properties which stack up. Previously they have lost many deals to amateurs who haven’t included all the costs and as a result have over paid for the properties.

This doesn’t mean prices will necessarily fall, there is still too little stock in most places versus the demand, but what it will do is mean that prices for investment properties won’t necessarily be competed up so much as they were in the past from 2016.

Read - Buy to Let Quick Guide

What buy to let investors need to do now
Its essential that investors really make sure they take independent financial and tax advice. Without this, adding extra property wealth to what you already own might not be the right thing to do financially and with changes in the budget and Autumn Statement it may mean there are other investments you can do that deliver a better return.

At the end of the day you are investing in property to secure additional investment funds to achieve an objective.

The most important thing is to make sure property, with the stamp duty and mortgage tax relief changes, still delivers on your objectives better than other financial investments.

If you are investing professional over a 15-20 year period, taking advantage of things like gearing and tax breaks you can still achieve, it still should.

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