Previously I gave an overview of things to consider before investing in buy-to-let property. Here, I’ll take a look at the pros and cons of investing, some of which are based on my own experience in buy-to-let.
Benefits of Buy-To-Let
Buy-to-let can be a good investment which may bring the following benefits:
Rental Income
Your tenant pays the mortgage, bringing in steady cash flow.
Hedge Against Inflation
It is a good hedge against inflation as rents usually go up over time and the value of the property may go up increasing the equity you have in the property.
Diversify Investments
You can diversify your investments by purchasing property. This helps spread your risk across various assets e.g. equities, bonds, crypto, gold and property.
Build Equity in the property
As time passes, the value of the property may go up. Therefore, you are continuing to build equity in the property. You can eventually sell it. The lump sum may be used for another investment property or it may bump up your ISA and/or pension pot.
Use Leverage for Buy-To-Let
In buy-to-let, you put at least a 25% downpayment on the property, get the remaining 75% of the money via a buy-to-let mortgage from the bank and purchase 100% of the property. As the value of the property increases, you may be able to remortgage the property and use the money to buy another property. Then rinse and repeat.
From Buy-To-Let to Potential Home
You can use the property as your home if you need somewhere to live. For example, if you have been living abroad and want to return home.
Buy-to-Let Expenses
You may be able to claim expenses against the rental income thereby reducing your tax. Some examples of expenses include water rates, gas bills, electricity bills, council tax, letting agent fees, property management fees, landlord insurance, and general repairs.
It Ain’t All Sunshine and Roses
These are some examples of how things can go wrong and in many cases, I speak from experience!
Landlord Obligations
Landlords have multiple obligations such as ensuring the safety of the property they rent out, issuing tenancy agreements, managing rent arrears, managing finances, repairing the property in a timely manner and to a good standard, filing tax returns and ensuring they are tax compliant.
Tenants
You must get a good letting agent to vet each tenant. However, despite this, the following can and does happen.
The tenant stops paying rent
This can be quite stressful if it happens, as you must pay your home mortgage and a second buy-to-let mortgage. You must work with the tenant to try and get the rental arrears cleared. If the tenant still won’t pay, you need to evict them.
Tenants may wreck the property
Unfortunately, some tenants won’t look after the property. In one case, the tenant hadn’t paid the rent, so she eventually left. However, when I finally got into the house, she had left 60 large refuse sacks at the back of the house full of rubbish as she wouldn’t pay for refuse collection. Inside, the house was filthy, with dirty soiled nappies and general rubbish lying around. I had to send a team into the house dressed in space suits to clean it up. In another case, tenants were burying rubbish in the back garden!
Tenants run a business from the property
Some tenants may decide to run a business from the property. It may be against the terms of the lease. This is particularly problematic if the business they run is illegal.
Evicting tenants
There is legislation and procedures in place to protect tenants from illegal evictions and rightfully so. However, there are some situations where you will need to evict the tenant, for example, if they are not paying rent, have engaged in anti-social, abusive, and disruptive behaviour, or are running an illegal business from the property. Ensure you follow the correct eviction procedures. Otherwise, you may be found guilty of harassment or illegally evicting your tenants.
Calls at Untimely Hours
When buying a buy-to-let property, are you willing to be woken in the middle of the night by a tenant who has no heating in the depths of winter, who has a burst pipe with water flowing all over the bathroom and down the stairs etc.? Are you prepared to deal with calls on Christmas Day, your birthday and when you are on holiday? You need to be prepared for this.
Rent
Rents don’t always go up
During the financial crisis in 2007-2008, rent on my properties plummeted. Many people moved back home with their parents as they had lost their jobs and had no money. It was difficult to get tenants. When I eventually did, I had to drop the rent significantly just to get tenants to move in.
The rent doesn’t always cover the mortgage
As a follow-on from the above, when rents drastically dropped, they did not fully cover the mortgage. For a time, I had to top up with my own money to ensure the mortgage was paid every month.
Vacant Periods
You will have vacant periods
There have been times when the tenant moved out and it took a month or to two get another tenant. During this time, you need to ensure you have the money to cover two mortgages, your own home mortgage and the buy-to-let mortgage.
Buy-To-Let Government Policy
Government policy may change
The government may change rules and regulations for buy-to-let properties. For example, the amount of notice a landlord must give a tenant to leave the property, tax on rental income, right to rent checks etc. Always keep abreast of any changes which may affect your investment property.
Costs
Maintenance costs
Properties need to be maintained and repairs need to be done in a timely way. This could be something small like fixing a burst pipe or something big like fixing a roof. So, you always need to have money set aside to pay for maintenance.
In one case, I had a tenant who never opened the windows in winter as it was too cold. Eventually, dampness built up in one of the rooms. I had to treat the dampness and repaint the room. I also had to persuade the tenant to open the windows every day otherwise this problem would keep reoccurring.
Large deposit
A larger deposit, usually 25% of the property’s value, is required to buy a buy-to-let property.
Management fees
If you are renting out an apartment, you still need to pay management fees. Depending on the facilities in the apartment block they can be quite hefty. If the property is vacant, you still need to pay them.
Buy-To-Let Taxes
Rental Income Tax
You need to do a tax return each year to account for the rental income and any relevant expenses.
Capital Gains Tax
If you sell the buy-to-let property and make a profit, you will need to pay capital gains taxes.
Stamp duty
In the UK, you need to pay an extra 3% stamp duty when buying buy-to-let property. This, in addition to the 25% deposit means you need a lot of cash upfront to enable you to buy the property.
As an example, if you are buying a £300k home:
– as a first-time buyer, you could put a 10% deposit down of £30k and stamp duty would be nil.
– if you are moving and buying your next home, you could put a 10% deposit down of £30k and stamp duty would be £2.5k.
– as a buy-to-let investment, you would have to put a minimum 25% deposit of £75k down plus you would need to pay £11.5k in stamp duty, bringing the total upfront investment to £86.5k. So, that is almost 3 times the initial investment required than either a first-time buyer or someone who is buying their next home/moving home.
Property is not very liquid
If you need money in a hurry, then look elsewhere. Property can take a long time to sell. It may not even sell in which case you will need to go back to renting the property out again.
Understand The Pros and Cons of Buy-To-Let Before Taking The Plunge
There are pros and cons to investing in buy-to-let property. You must do your research on the property you are planning on buying and be fully aware of the risks and rewards of investing in property. You must also understand that being a landlord can be quite difficult and challenging and comes with a lot of responsibilities.
If you have any other pros and cons to add, please do so in the Comments section below.
Thanks for reading!
DISCLAIMER: Inquisitive Finance operates on principles of exchange of knowledge, ideas and opinions and learning in the community. Your decisions are entirely your own responsibility, and I am in no way responsible for your actions. I am not a financial advisor. Whilst I strive to provide accurate and up-to-date information, I make no warranties or representations as to the accuracy or completeness of this information. Use common sense, do due diligence and where necessary, use the services of a licensed financial advisor, before making any financial decision and/or transaction.
