Money
Retirement
Downsizing? Make it pay
Buy-to-let is still a good way to create some income: but you should follow some golden rules, says David Hoppit.
Those of us who climbed the housing ladder during the 1960s and 70s are probably sitting on (or rather in) a fortune. Many will by now have seen off the mortgage and so the opportunities for major changes in lifestyle are varied.
Leaving the family home and its garden can be a wrench, but trading down to a more manageable home can release a lot of useful cash. And many are seeing the benefit of buying a smaller property (or even two) to rent out, either for the appreciaition in value or for the income from the "spare" property.
One couple, Jean and Brian Branch, decided on an unusual route. By selling their home in Upminster for just under £300,000 they were able to purchase their dream narrow boat, which cost less than £100,000. That left enough to buy a cottage close to Braunston Marina, near Rugby: which they can use either over winter or to rent out when they move on to their boat.
"It was hard condensing a lifetime of possessions to fit into a seven foot wide narrow boat with a floor area of about one tenth of our family home," says Jean, 69. "But the pace of life on the canals has to be experienced to be believed."
The past few years have seen a massive rise in the buy-to-let market, with many people taking out large mortgages in the expectation of finding tenants who will pay enough to meet the repayments. With reasonable caution this remains a tempting scenario, but rising interest rates are causing a distinct wobble in the mortgage market.
This, coupled with the recent dramatic rises in property prices, means that rental yields have slipped from the peaks of two or three years ago, when they nibbled above seven per cent. Now a return of six per cent or a little less is more likely. Even so, it’s better than the building societies offer. However, rising interest rates need not concern those who can afford to buy an investment home without a large mortgage – and there are still many potential tenants.
Sensible investors seek little more than to cover the cost of financing and running the investment property from the rental income – or as the letting agents would say the property must "wash its face".
Capital appreciation is the name of the buy-to-let game and in the medium to long term that gain could be considerable. Be aware, of course, that an unexpected property-price crash could leave you with negative equity when the time comes to sell.
Buy-to-let - the basic rules: * Treat the whole enterprise as a business it is. It might make sense to take out a mortgage to increase your scope. For example, if you buy two properties instead of one, the chance of having no tenants and thus no income is reduced, and all repayments on an interest-only mortgage are tax-deductable.
* Unlike normal mortgages, where loans are based on income, lenders look at the likely rental income and lend up to 85% of the cost. Veteran investors put in as little as they can, but first-timers will probably exercise caution, borrowing perhaps 25% of the cost. It's probably best to start small and go for a fixed-interest mortgage – and keep a kitty in reserve.
* Be clear about what you want. For instance, the rules and tax liabilities for holiday home letting are very different tfrom those involving long term tenancy arrangements. If you are a cash buyer you are in a strong bargaining position.
* Most people buy in an area they know, but make sure it is somewhere that potential tenants want to live. A reputable letting agent will tell you what type of property is in demand – and this can vary from area to area and from town to town. There's no point in buying a three-bedroom semi if the demand locally is for one-bedroom flats.
* Don't allow emotion to get in the way of decisions. That heart-stopping thatched cottage deep in the countryside may indeed appreciate in value, but while it does it might be difficult to let.
* Avoid buying at big, new developments where lots of properties will become available at the same time. There are only so many tenants to go round.
* To avoid the hassle of collecting rent and finding tenants, put your trust in a reputable letting agent. Commission is usually about 15%.
* Consider a furnished property: the cost of insuring the contents is tax deductable and there is an annual 10% "wear and tear" allowance on the contents.
