The Daily Telegraph - Saturday - Money
I’m a train driver on £90k. I want to be a landlord
Richard Brown, 38, would like to know if buy-to-let will provide his later-life income. By Tom Haynes
When Michael Gove spent the summer talking about how so- called good landlords were necessary for the rental market to bounce back, he was probably talking about Richard Brown.
Despite stubbornly high interest rates on new mortgages, Mr Brown, 38, is desperate to become a buy-to-let landlord. He currently works as a train driver, earning £90,000 a year including overtime. It was his third career change since he left university, having previously tried his hand at being a teacher, and a personal trainer.
“I was a bit lost at 30, earning minimum wage in the gym and living at my parents’ place,” he said.
Since starting as a train driver, Mr Brown has been a diligent saver: he has £25,000 in cash, £50,000 in Isas, and £ 200,000 in pension savings, having made use of voluntary contributions to make up for his time as a PT.
The only debt he has left is his student loan – a mere £5,000.
Now living in his own home, for which he paid a 25pc deposit and has benefited from 50pc equity, Mr Brown is pleased with the way he’s turned his life around. But with £75,000 saved up in total, he wants to know how to approach the next phase of his life.
“Do I pay off the student debt, or do I buy another place? My dilemma is I have a substantial pot and I want the best possible return on my investment,” he said.
Mr Brown has previously invested in funds, but finds it boring.
“I’ve invested in funds averaging around 7.5pc before, but it doesn’t really excite me, even if it is a decent return,” he admitted.
The lure of the property market is that it will be a project, but also that it may provide for the family he hopes to start with his partner, a junior doctor 10 years his junior.
“Until recently I’d never been in a position financially to provide for a family,” Mr Brown said.
In the long-term, Mr Brown hopes he will be able to work part-time from the age of 55, and rely on passive income from rental properties to support a family and do some travelling. But is the buy-to-let market really the best option?
Howard Levy Director at mortgage broker SPF Private Clients
Most people, especially those with a high income such as Mr Brown, tend to purchase their buy-to-let properties via a limited company. But in the first instance, he should discuss this with an accountant, who might suggest looking at arranging the purchase in a way as to incorporate Mr Brown’s partner into the ownership.
This could mean utilising different share classes, for example. The decision to purchase in Mr Brown’s own name or via a limited company often comes down to taxation, as well as offsetting costs against rent. The means of taking funds out of a company can be very tax-efficient if arranged correctly.
This would come in useful if Mr Brown did go travelling, as there could be a potential income coming from the buy- to-let – thus utilising his yearly income tax allowance while abroad.
It is a good idea to spread assets between different investments so that he isn’t reliant on any particular asset class. Starting a buy-to-let portfolio in an area you are familiar with is a good idea. Knowledge of the places to avoid, as much as the ones to buy in, is useful when looking at a purchase.
Purchases of houses of multiple occupants ( HMOs) usually take more time to manage, and the health and safety requirements are more rigorous – but returns can be higher.
If Mr Brown has his mind set on a flat, this can also be a HMO. Larger flats with three or more bedrooms can be let to various tenants. Deposits are typically 25pc or more for purchases, so Mr Brown must be realistic about his budget, given the deposit available, and be sure to leave some to cover the higher stamp duty, as well as licensing, registration and other purchase costs.
Interest rates for HMOs tend to be slightly higher than single assured shorthold tenancy properties let to one family unit. However, they typically command higher rents which means that the maximum loan amounts lenders can offer are also marginally higher.
Mr Brown mentions overpaying on his main residential mortgage.
This is a good option for up to 10pc of the loan amount per year ( the usual amount you can overpay without incurring redemption charges).
Many clients start with a single buyto-let and then wish they had purchased it in a limited company name. It becomes more relevant for succession planning later down the line when you can add children on as shareholders, with a view to them taking over what I am sure will be a flourishing buy-to-let business in years to come.
Daniel Hough Financial planner at wealth manager RBC Brewin Dolphin
Investing is not meant to be exciting – if it is, you are probably doing something wrong. It is, nevertheless, the main way individuals can build their wealth for the future. Remember, your pension is invested in stocks, bonds, and potentially other assets – they are the main vehicle people use for retirement.
They also offer immediate tax relief if you are making a personal contribution, which builds up over time and can make a significant difference to your final pot.
Mr Brown’s £200,000 pension at the age of 38 is a good baseline to build on. Depending on the risk level he has opted for, it could be worth around £400,000 by the time he is 50 and £ 800,000 by 62, if we assume it roughly doubles every 12 years without any further contributions. He may also want to give some thought to whether he wants to add to his £25,000 safety fund or cut it.
If Mr Brown’s Isas are in accessible cash accounts, then he certainly shouldn’t need to add. He may also want to consider switching to stocks and shares Isa, which have historically outperformed cash over the long term.
If Mr Brown feels like his student debt is hanging over him then he should clear it. The overall amount is low and the rates are likely to be better than other forms of debt
While £ 5,000 is unlikely to take much off his mortgage, paying off even a small percentage of a mortgage early can save substantial amounts of interest over time. If he is not interested in investing, then reducing liabilities is a good alternative use of spare money.
Mr Brown will also need to factor refurbishment costs, reduced capital gains allowances, and the fact he intends to rent the properties out at an under-market rent into his yield and weigh up the opportunity cost compared with stock market returns.
If Mr Brown’s planned retirement in 15 to 20 years is set in stone, and he stops working at 53, then he really doesn’t have many options other than to invest. With investing you can make changes and diversify much more easily. Pensions and investing are the only way he will be able to make his plans for retirement work, with pension contributions by far the most tax-efficient option.