I had an interesting email from someone a few weeks ago that I want to share with you (don’t worry I asked his permission to share this with you all). In a nutshell, the gentleman lives is in his mid 60’s and still working. He has a decent pension, so that when he does retire in a couple of years’ time, he will have a comfortable life. He had recently inherited £200,000 from an elderly aunt. One option he told me he was considering was to put it into a savings account. The best he could find was a 2 year bond with the Post Office which paid around 1.2%; meaning he would get £3,800 in interest a year. One of his other options was to buy a property to rent out and he wanted to know my thoughts on what he should buy, but he had concerns as he didn’t want to take a mortgage out at his time of life. He was also worried about all the tax changes he had read about in the papers for landlords.
Notwithstanding the war on landlords being waged by George Osborne, the attraction of bricks and mortar endures for many. As our man is a cash buyer, he would not have to deal with the intricate cut to mortgage interest tax relief that will diminish, or even eradicate, the profits of many landlords. It’s true he would face the extra 3% in stamp duty to buy a second property, but with some good negotiation techniques, that could soon be mitigated.
I told him that buying a buy to let property is all about the total return on investment. True, he could put the money in the Post Office bond and receive his interest of £3,800 a year or, as he rightly suggested, invest in property. A typical, average yield at the moment is around 5% per annum, meaning our potential F.T.L (First Time Landlord) should be able to, depending on what he bought in the area, earn (before costs) £8,340 a year. (However, I told him there are plenty of landlords earning half as much again (if not more), if he was willing to consider more specialist investment types of properties – again, if you want to know where – drop me an email - firstname.lastname@example.org).
The bottom line is that the success of investing in buy to let property versus a savings account with the Post Office (or whatever Bank or Building Society is offering the best rate) will depend on the performance of those assets. Unlike with a savings account, with property the capital you invested can also go up (and yes, it can go down as well – more of that in a second). Property values have risen in the last twelve months, meaning that if our chap had bought a year ago, not only would he have received the £8,340 in rent, but also seen an uplift in his capital meaning his overall return for the year would have been well in excess of 4% (not bad when compared to the Post Office!).
The doom-mongers amongst you will say, “property values can go down, as they did in 2008, and in 1988 and 1979”. Yes, but after 1979 prices had bounced back to their ’79 levels by 1984 and went on to grow an additional 58% in the following four years. Then again, they dropped in 1988 and did take 13 years to reach back to those 1988 figures, but the following six years (between 2001 and 2007) they then increased by an additional 66%.
I believe that all this talk of property crashes must be viewed, surely, with the realistic understanding that property prices are, and always will be, cylic.
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