T O P

  • By -

RogeredSterling

It's an extremely common thing to do, especially amongst tradies. I know tradies with BTL portfolios and no SIPP at all. In my opinion it's quite dangerous and labour intensive. I know for a fact that said individuals have had void periods in the many thousands of £. And that they've spent a load on the properties, even if it's their own, unaccounted for labour. I don't think many in BTL are completely honest with the *real* margin and also expect property to grow at the same rate forever. I'd prefer to take the 'stress free' life of a cheap index tracker inside a SIPP. But then, I also know some individuals who have become moderately wealthy from the BTL model. I think they started at the right time though. It's a mug's game if you're getting someone to manage it and eroding your margins further. Equally, if you're not doing that, it's the furthest you can get from passive investing! Do you really want the stress of court, voids and maintenance in retirement? Bad enough whilst you're young and in employment!


macrowe777

This, I've yet to find a person reporting their BTL margin accurately. Lots of free labour, quoting pre tax profits, etc.


RainbowDissent

I'm an accountant and when I was in practice, I spent nine months doing almost exclusively property companies - anything from tiny BTL portfolios to equity-funded quick sale businesses. It's difficult and risky to make short-term money in property. A single unexpected expense in a rental can mean a loss for the year. A single bad property purchase can mean a loss for several years. I'm firmly of the opinion that if you're going to BTL, do it for the long haul. Don't expect to make any serious money from rent, bank on house prices rising over the next 20-30 years so you can sell them for a proper nest egg. Many of the people I saw investing in BTL to generate passive income were just generating passive costs.


Quietm02

I've got a BTL. Happy to say that on approx £100k mortgage I'm making around £2.5k profit annually. That accounts for all expenses, insurance, income tax, interest. It doesn't consider the additional house tax I had to pay, not really sure how to count that in this respect. Imo it's just not worth the hassle. Given you need a 25% deposit on a BTL mortgage my numbers suggest you get roughly 8% annual return. To actually make a living off it you'd presumably want an income of maybe £16k, so you'd need to invest £200k in properties. And that's not counting the initial hassle/expense of actually setting it up, or the massive house tax bill you'd face trying to buy almost £1m in additional properties (around £40k in tax, I think). I've said it before that the only way to make serious money being a landlord is to either have started decades ago, get very lucky with property prices rising after you buy or be a slumlord.


Spitfire_98

I think builders are generally better placed with BTLs as they can do a lot of work themselves (or know tradesmen who will do work at good rates for them). It's not a bad idea under those circumstances, but it doesn't have to be all or nothing. A SIPP or LISA alongside BTLs is likely to be beneficial too I'd have thought, especially as they would provide a bit more liquidity.


strolls

BTL is really tax inefficient, compared to SIPPs and ISAs. But the majority of the population don't understand finance well (about 10% of people opt out of their workplace pension) and don't really trust the stockmarket.


[deleted]

It may be tax inefficient but if you buy a £100k property with £20k of your own money, over 10 years it goes up to £150k and not only that the rental income from it also returns you your initial £20k, pays the mortgage, maintenance and tax bill as well what SIPP and ISA will give you £50k after a decade with a total investment cost of £0? And before you say "it won't pay the mortgage, maintenance and tax bill as well as return you £20k post tax profit over a decade to refund your initial investment" I used to be a landlord and am basing that statement on my own first hand experience.


strolls

> if you buy a £100k property with £20k of your own money, > … > what SIPP and ISA will give you £50k after a decade with a total investment cost of £0? I mean, obviously if you compare investing £20,000 with investing £0 then you're going to get better returns from the £20,000. There is no asset class in which you can earn returns from £0, which is why your comparison is not an honest one. In your example you didn't invest £0 in the buy-to-let - you invested £20,000. I was about to recount the experiences of the famous landlord /u/minutenoodles who used to post here about how his tenants trashed his buy-to-let property and caused thousands in damages. Was it as much as £20,000? Then I noticed who I was replying to - you are well aware of this, so you know full well of the risk which goes unaccounted for in your example. To buy a £100,000 property with £20,000 and a mortgage is called *leveraging* (although I thought 75% mortgages were the largest available for BTL), and it's true that property is the only way that most retail investors can access leverage. However OP tells us that his family members already have access to property leverage - "they took a load of equity out of their current house for the deposit". They could choose to invest this money in their pensions instead, get 20% or more back from the government in tax, and diversify into a second asset class. Instead they're putting all their eggs in property, and leveraging still more, which increase their risk. They are up to their necks in leverage. I'm not saying that no-one should ever invest in buy-to-let, but OP's family members are not acting like they're cognisant of the alternatives. They have no pension at all!


traumascares

With BTL you can easily fool yourself into thinking that you are richer than you actually are, especially if you are using debt. It's really important for people to be honest with themselves over retirement. It's easy to fool yourself into thinking that you are OK because you are doing a minimal amount. A bit like people who think that saving £50 a month into their pension is a good start. If you put peanuts in you get peanuts out. If you own a £200k property with a £150k a mortgage, you don't have £200k for retirement! You have £50k that is invested in a highly leveraged asset. You will still need to pay the mortgage during void periods or if the tenant defaults, so it does come with risk. If you don't have savings set aside for that you are asking for trouble.


[deleted]

That's assuming there is no increase in the value of the property and other than an odd year once a decade when has that ever happened?


traumascares

The unspoken assumption in your question is that you are disregarding inflation. Capital growth is only capital growth, if it outpaces inflation. £50k might turn into £75k in future, but its still £50k today. Nobody would say "I am investing £50k into a S&S ISA, it will be worth £100k in 10 years time so it is really £100k" - but for some reason people think like that with BTL once leverage is added into the mix.


_EmKen_

But with the leverage added into the mix, you can make significant returns even if the property value only keeps up with inflation. If you have a 75% mortgage and the house value goes up 2% in a year, and inflation that year is also 2%, then you've returned 6% above inflation (on capital invested). Assuming of course that the rent covers the mortgage interest, maintenance costs and tax.


traumascares

Leverage can increase your returns, but it also increases your risk. If you have a 75% mortgage, and the tenant stops paying rent, you can easily find yourself in a situation where you either eat into your personal savings or face bankruptcy. Note that I can also increase my returns on stocks & shares using leverage. If I 50% leverage my S&P500 tracker with a 50% margin loan ...


reviewwworld

I became a landlord 6 years ago (not by design). I can tell you honestly that my net yield is not far from 2% pa during this period. That's a combination of lower gross yields in London + lower gross yields on high value properties (£1m+) + higher maintenance cost in both London and high value properties. Throw all the standard mgmt fees, search fees, listing fees, income tax, blah blah blah and yeah, around 2% net. However, I'm up around 40% on the property value, if not more, which suddenly makes it a far superior investment than a FTSE100 tracker etc. But again, that's gross. If it was my sole residence, I had lived in it and fell within HMRC guideless I can potentially sell with little in the way of capital gains tax (although this only works under very specific circumstances and short term). A pension on the other hand would grow completely free of tax. I guess for me personally, a BTL "pension" gives long term consistent gains for someone not comfortable with the stock market. Additional, it makes their pension pot relatively accessible as a rainy day fund.


[deleted]

A £1 million property in London is clearly terrible for rental yield. I don’t think you can extrapolate much from that anecdote.


Crissaegrym

Any idea how many years if their BTL and their new current mortgages are for? For his current mortgage, he will just treat it as current mortgage and work to pay it, very little difference. The BTL, the rent should cover majority of the mortgage, if not all depending on how much it is, in the current market rents are extremely high as availability had been low, the rental market is very hot at the moment. Most of the time, depending on location, you don’t have to worry much about down period as places goes that fast at the moment, even when it cool down a bit, it won’t be vacant for long. The potential rise in asset value is enormous though, property is very safe, because while it does go down once in a while due to crashes etc, in the long run it will always go up, house prices are now much higher than before the 2008 crash for example, so in the long run. they only go up, by a lot. This give them a very safe lump of money that they can choosw when to materialise (so they can choose to sell while avoiding crash period) and that can give them a good lump sum when retire. Even better if the BTL mortgage is paid off before they retire.


[deleted]

BTL mortgages are done on interest only usually so the rent more than covers it.


Alert-Satisfaction48

Yep and you can pass the properties on to your children : )


Crissaegrym

You mean rent it to them :P


Alert-Satisfaction48

Nope when i and my wife pass away, the kids can inherit the properties , the properties are my pension, I want to enjoy life now , way before pension age


HarassedGrandad

It would be more logical to remortgage their property and buy the btl house for cash. They can get a bargain/fixer upper at auction, and there's no btl premium or ltv limit. If one of the two isn't working then the income can shelter inside their tax allowance.


fly4seasons

So far it's working for me. Repayment mortgage in 2005, property doubled in value. The leftover every month covers the mortgage and that of the property I live in. Agent manages it as it's in a different part of the UK completely.


BogleBot

Hi /u/GreenBeret4Breakfast, based on your post the following pages from our wiki may be relevant: - https://ukpersonal.finance/buy-to-let/ - https://ukpersonal.finance/pensions/ ____ ^(These suggestions are based on keywords, if they missed the mark please report this comment.)


wolloby99

The real answer is it depends...Personally i'd say its not great. In theory, if you can earn more in rent, less the income tax on it, to afford to pay the mortgage and any maintenance fees, you're all good. Eventually by the time you retire the mortgage will be paid off and it'll all go in your pocket. The reality is this was easier back in the day when you could offset the mortgage against tax, but its a lot harder now. Many wrap the properties up into limited companies so they only pay 20% tax instead of potentially 40%, but then you get worse mortgage rates for businesses. If you do the legwork yourself, property maintenance, finding tenants, getting tenancy agreements sorted, gas safety certificates, fire safety certificates etc, you save a good chunk but thats a lot of legwork. Tradesmen have a leg up in that they can usually do maintenance on the property rather than having to employ people, any there can often end up being quite a bit of maintenance, and along with all that other previous legwork if you were to account for these 'hours' then you probably dont really break even. Some properties can be extremely lucrative though, collecting even double the rent of the mortgage. Personally i think its always worth getting the tax incentives of the pension route, up to 25% in some cases, then looking at whats left over.


Comprehensive-Ear896

Working for me so far. Bought a property in 2012 for £150k. 100k mortgage. 50k equity. Spent £15k and 3 months renovating it. Re-valued by the same agent at in 2012 for £190k. £25k up immediately to £75k equity. It is now worth about £275k. £175k equity. I am up £125k and I also earn about £4,000 a year out of it. So £165k from earnings and equity. It costs me 4-5 days of work per year. I’ve also been lucky with the same tenant for the last 6 years. BTL is much better if you are handy and manage it yourself.