Reforms From The Last budget Taking Effect This Week

April 12, 2015 by Rob Kahl

With the reforms from the last budget on pensions taking effect this week, are we likely to see a surge of people looking to purchase buy to let properties to generate an income for their old age?

The government announced that from April 5th pensioners are able to take out 100% of their pension pot, giving pensioners the freedom to decide how and where they invest their money to give them the best possible return.

There seems to be a few early teething problems inevitably with the process not being as straight forward as expected and the tax implications of taking out the whole amount seem complicated. Advice should be sought, but as you can imagine as an estate agent specialising in sales and rentals, I am going to heartily recommend purchasing a property to rent out.

There are lots of things to consider when doing so though but hopefully, I can steer you in the right direction. If however you would like some more detailed advice please do not hesitate to contact me.

What should I buy?

This really depends on you and how involved you want to be and of course how much you can afford. A property suitable for student accommodation will give you an excellent yield but may need constant upkeep and maintenance and may mean renting rooms separately which will lead to more fees and possible lost income. 1 and 2 bedroom flats are always popular in good areas around Leigh, close to stations & the Broadway but most things locally rent so you really can’t get this bit wrong.

How do I work out my yield?

This is calculated by working out the annual rent and dividing it in to the price you have paid. I.e if a rental property is £1,000 pcm therefore, £12,000 per annum and you have paid £200,000 then your yield will be 6% per annum. Much better than most banks.

Beware however. Most experts will calculate yield over 10 months of a year rather then 12. The extra 2 months will account for fees, maintenance and any void periods when the property may be empty. So on the same scenario as above 10 months worth of rent will mean a yield of 5%. Still good but worth considering.

What about tax?

When working out tax, quite a lot gets taken into consideration when it comes to income. You can offset the cost of any interest payments from a mortgage, any fees relating to when you purchased the property to ongoing management fees and block service charges and any work that you have had to do or had done to the property. So make sure you keep those receipts.

Fees, what fees?

Obviously when purchasing the property initially you will have things like solicitors fees, stamp duty and then on top, you will have rental fees. This will normally mean a fee to secure a tenant to cover things like advertising and drawing up the contract. There will also be an ongoing charge for a lettings agent to manage the property. This will include drawing up an inventory, collecting rent, dealing with any issues and carrying out periodical inspections. There may also be service charges which leads to the age old question…..

Leasehold or freehold?

This choice may be made for you depending on your budget. You just may not be able to afford a freehold property. Leaseholders will have fees including ground rent, contribution towards buildings insurance and probably a service charge that will include maintenance and a possible sinking fund for larger jobs. Freeholders however don’t have any of these charges but are responsible for arranging their own buildings insurance and obviously if any work is required to the property have to pay the total of the cost. Some people prefer the control of freehold properties whereas others prefer the peace of mind of someone else or a company looking after it on your behalf. It really is down to personal choice.

Why not then?

Why not indeed! As long as you are thinking of a long term investment, i.e for at least 5 years, then there really is nothing like bricks and mortar to invest in. There may have to be some involvement from you though, it may not be a case of buying a property, renting it and just watching the money roll in. There are plenty of horror stories I could share with you but I am sure you wouldn’t want to be bored by them! The majority of rental properties tick along without any problems and 99% of tenants are great and look after properties so you should earn a good income from a buy to let property whilst earning capital growth from your investment and maybe even have a nice nest egg to leave to the family once you have gone.

Let me know when you want to start viewing properties or if I can help you find a tenant for a property you have already bought!

This article is by Rob @ Scott & Stapleton