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Property problems: think twice before plunging into buy-to-let

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Property problems: think twice before plunging into buy-to-let

Life is about to become a lot tougher for Britain’s army of buy-to-let investors.

Chancellor George Osborne announced in his Autumn Statement that people purchasing additional properties and second homes will pay an extra 3% in stamp duty from April 2016.

‘Frankly, people buying a home to let should not be squeezing out families who can’t afford a home to buy,’ he said. ‘It will be introduced from April next year and we’ll consult on the details so that corporate property development isn’t affected.’

This extra stamp duty is expected to raise almost a billion pounds by 2021, with the proceeds to be partly reinvested in local communities such as London and Cornwall, where many people are being priced out of home ownership.

Jason Witcombe, a director of London-based Evolve Financial Planning, said the increased stamp duty would make the entire buy-to-let arena less attractive for would-be investors looking to enjoy a source of income and longer-term capital growth.

‘It’s been a pretty brutal attack on buy-to-let by the chancellor,’ he said. ‘Lots of our clients have buy-to-let properties, although it’s not something that I’ve recommended as I’ve seen quite a lot of people lose money in this area.’

Local lottery

Witcombe said many investors had made money from this area purely because they happened to live in an area where prices had risen.

‘We can sometimes become fixated with London and the South East, whereas other areas of the country haven’t experienced anything like the same rises,’ he said. ‘I always advise clients not to get sucked into the hype that property prices can only go one way.’

Justin Modray, director of Buckinghamshire-based Candid Financial Advice, said the changing environment and increased transaction costs were a cause for concern, but pointed out the sector had done well for investors since the mid-1990s.

‘There’s no doubt it has been a particularly lucrative investment over the last 20 years for many people, primarily due to the meteoric rise in residential property prices in the UK,’ he said. ‘But going forwards there are some question marks.’

He said the first was property valuations. ‘Prices seem to keep rising but when you compare these increases with average earnings it’s hard to see how this can continue over the next five to 10 years – although we could have said the same thing a decade ago,’ he said.

Rate hike fears

Another concern for property investors is the looming prospect of rising interest rates.

‘This could be a double whammy for buy-to-let investors as rising rates would be a leveller on house prices, while those borrowing money to invest in a buy-to-let property will see their costs increase,’ said Modray.

If the chancellor’s recent announcement is the start of an increasing wave of taxation pressure on the buy-to-let market this could be disastrous, said Andrew Merricks, head of research at Brighton-based Skerritt Consultants.

‘The more unattractive it becomes from a cost point of view the more people will look to get out,’ he said. ‘If there’s a reversal of the tidal wave of people that went into it, there will suddenly be a lot of property available and investors will be selling into a falling market. This means you won’t get your capital back if you bought at the wrong time.’

Merricks said he also had concerns over liquidity. ‘You have to be able to turn any investment into cash at very short notice because if things aren’t working out you want to change your mind without penalty and costs,’ he said.

Troublesome tenants

While commercial property is a key part of investment portfolios, principally exposure to specialist funds that buy and manage a wide variety of office, industrial and retail space, buy-to-let poses more challenges for individuals.

Carl Melvin, chief executive at Paisley-based Affluent Financial Planning, advises clients to give buy-to-let a wide berth. He is well placed to judge as he has been an investor in this area for the past decade.

‘When you work out how much everything costs to set up and manage, particularly with all the obligations you have as a landlord, the return on your investment is not as compelling as it initially appears to be,’ he said.

He said the most significant negative was the lack of control over the outcome. ‘If the tenant loses their job or experiences financial difficulties, their problem becomes your problem,’ he said. ‘If they don’t pay their rent it’s a difficult situation to resolve through the courts.’

There are also unforeseen expenses. ‘If a significant repair needs to be carried out to the building this can wipe out your profit from the investment,’ he said. ‘If nothing bad happens and people pay their rent it’s wonderful, but life isn’t like that.’

Melvin believes a lot depends on a person’s reasons for entering the buy-to-let sector. If they see it as a generator of longer-term capital growth it can make sense, but if they want it to generate an income things are slightly different.

‘If you rely on the income, or are retired, you don’t want it exposed to that kind of risk,’ he said. ‘You want a predictable, reliable income stream, and my concern with buy-to-let is that when it goes well it’s wonderful but when it goes badly it’s terrible.’

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