‘There are still profits in buy-to-lets’
Despite new taxes, this reader expects to build a property empire that will allow him to retire in his 50s, says Sam Meadows
Falling house prices, increased political uncertainty and a raft of punitive tax increases are all casting shadows over the property market. While a few years ago those with cash to invest were quick to view property as a safe route to financial security, that’s no longer the case. Middle-class “armchair” landlords have long stopped boasting about their rental sidelines. Given the controversies around Britain’s chronic housing shortage, some are even embarrassed to admit they own any property beside their home. But there are still many young investors who think there is a sound business in buying multiple properties and renting them out.
Iain Greer, who has worked in the lending industry for 12 years, is about to embark upon an investment aimed to set him up to retire in his early fifties. Based in Irvine, in the west of Scotland, the 32-year-old feels this is his surest route to build wealth.
“People always need houses,” he said. “There’s always going to be a market. Not everyone is in a position to own, so there’s a steady rate of renters. In my 12 years of being involved in the industry between housing and mortgages, the buy-to-let market has changed drastically every year. The whole housing market has.
“As with all investments, you can’t predict what is going to happen. If you buy the right property and keep your costs as low as you can, it means that if anything does happen – for example, the housing market crashes again
– you can afford to ride out the storm.”
Mr Greer is about to purchase two ex-council houses for approximately £60,000 to £65,000 each, putting down a 25pc deposit in each case. Assuming a rental income of £550 a month per house and interest-only mortgage repayments of £186, he would hope to make £4,400 a year from each house before tax and other costs. He reckons that even without capital growth this is the best return he can get on the money he’s saved towards the deposits. But he expects strong capital growth, which would enable him to rapidly repeat the process by withdrawing equity and using it to buy more properties.
He plans to be able to retire in about 20 years and use his buy-to-let empire as his pension. He said: “The average investor wants one or two [houses]. I’m planning to buy two a year, which will go to three a year, and then four until I have a large portfolio.”
Changes to the tax relief on buy-to-let mortgages, which began to be phased in this April, mean that by 2020 higher-rate taxpayers will not receive mortgage interest tax relief, and will be taxed on their entire rental income, less a new form of tax credit. It will push many landlords with large borrowings into the red.
But “professional landlords” can get around this by purchasing properties through a limited company, meaning they would not be affected by the taxation changes. This is precisely what Mr Greer intends, and he has already set up a company, ICS Wealth, for that purpose.
This is a trend that is beginning to be seen across the industry, although according to Shaun Church, of Private Finance, a mortgage broker, the full effects have not yet been realised by many. “I think it’s fair to say the market is suffering because of the changes,” he said. “We have had a triple whammy with stamp duty, tax relief and tighter regulation. But so far the tax changes haven’t really started to bite. People are aware of it, or at least I hope they are, but it promises to become more serious over the next few years.”
While buy-to-let remains hugely controversial, investors – in private, at least – admit they remain keen. Research by Barclays Wealth & Investments backs this up. It suggested that weakening house prices were not deterring wealthy existing investors or younger generations. Dena Brumpton, of Barclays Wealth, said: “Property is still viewed as an important part of a portfolio. Most people believe that it offers long-term investment security.”
But location is changing. High prices in London and other expensive areas have driven down the yields – the rental income relative to price – which makes these areas riskier and less attractive, particularly where buyers are heavily mortgaged. Research released this week by Property Partner, the property investment market, found the top 10 buy-to-let “sweet spots” are all in the North of England, including Stokeon-trent, Leeds, Gateshead and Newcastle upon Tyne.
Barclays’ research also suggested wealthier investors were looking to the North of England. Ms Brumpton said: “It’s interesting to see from our research how investment prospects are emerging outside of the established property heartland of London and the south of England, with economic growth and employment opportunity fuelling growth in hot spots across the UK.”