Buy to let a good move?

Conrad

Paul C, you have a packaged investment in the form of a pension already so I agree its time to diversify. Ive noticed that people who do some direct / imaginative investing invariably end up better off financially than those that put it all with institutions.

Also your 'eyes and ears' on the ground are often better than a fund managers and I mean this sincerely.

If you want to invest indirectly but not via traditional fund managers, Id go for purchasing property shares THAT THE BIG INSTITUTIONS INVEST IN ANYWAY.
That way you cut the middle men out of the loop. A good example is SPEYMILL who invest in German real estate. A quick glance reveals that all the shareholders are the big fund managers such as Merryl Lynch. There are plenty of other small property companies like this, another is DAWNAYDAY. You could buy shares in a few and cut out a heck of a lot of cost.

I also recommend doing your own direct investing. Personally I have just sold my UK portfolio as I expect capital growth will be massively higher abroad so the net result will be a far better return (I can always buy back inot the UK in 5 or 10 years with a much bigger pot). Its no problem buying abroad if you do your homework so dont be put off by the negheads! Id recommend E Germany, Morocco and Estonia if you want low prices yet high growth prospects and most importantly investor safety (for Morocco stick to the big international / reputable developers of course - https://www.lejardindefleur.com

Chrismaths

Er.. Dawnay Day are an investment management company who as well as property run a structured uk income product, commodities index fund and various financing operations. You would most certainly cut out some cost by investing directly, but you would also be be buying shares in companies you know little about, aka gambling.

You should also remember that 'bricks and mortar' property held in an open ended structure like an OEIC or UT can also be high risk. In germany recently they had a problem with companies overvaluing property in their fund, then when people came to sell their units in the fund, they didn't have the cash to pay out. You can't really sell part of a building!

Conrad

Chrismaths wrote:

Er.. Dawnay Day are an investment management company who as well as property run a structured uk income product, commodities index fund and various financing operations. You would most certainly cut out some cost by investing directly, but you would also be be buying shares in companies you know little about, aka gambling.

If you want gambling I'll refer you to an IFA.

EdInvestor

You should also remember that 'bricks and mortar' property held in an open ended structure like an OEIC or UT can also be high risk. In germany recently they had a problem with companies overvaluing property in their fund, then when people came to sell their units in the fund, they didn't have the cash to pay out. You can't really sell part of a building!

There is one risk related to liquidity UK investors should be aware of with these funds - they often reserve the right not to redeem your interest for up to six months.This is in case there is a "run" on the fund - as you say it takes time to sell buildings. THe alternative is to hold a chunk of the fund in cash for redemptions , and some funds do this, but it cuts back the returns, so investors don't like it.

This problem can be avoided if you buy property via the offshore investment trusts run by the big insurers which are listed like shares and thus can be immediately sold. The ITs are a bit more volatile than the bricks and mortar funds as we saw recently, but not as much as the REITs and the unit trusts invested in property shares.

Chrismaths

Well put Ed. Frankly, I think this whole REITs hype is overblown - If I was setting up a new property company, I'd still do it offshore. To set up a REIT from scratch, you'd have to set up a company, get money in (usually costs around 2-4% of capital raised), buy the property (paying 4% stamp duty) then pay 2% of the value of the properties as a 'conversion charge' (tax) to become a REIT. Unless there is a pre-existing portfolio of property, then it's just not worth it. Offshore still works better.

Conrad, Conrad. Getting professional advice for a fee or buying a company you don't understand - not even a property company! Ho Ho.

dunstonh

Perhaps Conrad thinks the Daily Mail is a better source of information

Gorgeous_George

meanmachine wrote:

Flats in my mate's mansion block in Hampstead have been selling for 320K in the last few months.

By your calcs, the rent would have to be £2100.

Current rentable value: £1200.

Crazy indeed. Even at the upper end of the 12-20 rule the investment makes no sense.

I agree that this investment as BTL would make no sense with a rent of £1200. I'd expand it to say that buying a house/flat at £320K is barking when they can be rented for £1200 per month. The Stamp Duty alone would cover 8 months rent!

On the other hand, buy a 3 bedroomed house for £75K and rent for £450 per month and the figures look somewhat better.

There is a BTL market outside of Hampstead.



GG

dunstonh

On the other hand, buy a 3 bedroomed house for £75K and rent for £450 per month and the figures look somewhat better.

That is still only a gross rental yield of 7.2%. Returns don't look attractive for the level of risk and taxation that you potentially face.

Gorgeous_George

I agree, but a better yield than 4.5% in Hampstead while also avoiding a lot of the costs that a £320K flat would have.

Risk
The impact of a crash on the £75K house is lessened by the lower property value. I can envisage meanmachine's mate flat being valued at £160K (half) but the £75K house will be less likely to fall by 50%.

Taxation
The tax liability can be reduced by borrowing (interest only) on the BTL and investing the money elsewhere. Agent's fees and some other costs can also reduce the tax burden.

In the end the choice is with the individual. Do the Business Plan properly, identify and mitigate the risks and BTL will work in some areas of the UK.

If the crash comes, buy some more properties. In the longer term, the risks will be reduced.

GG

dunstonh

Risk
The impact of a crash on the £75K house is lessened by the lower property value. I can envisage meanmachine's mate flat being valued at £160K (half) but the £75K house will be less likely to fall by 50%.

Risk isnt just price crash. If borrowing is involved you can be hit by higher interest rates and if coupled with a crash (higher interest rates would increase downward pressure on house prices), then you could find yourself unable to afford both mortgages (main residence and buy to let) but unable to sell the property because there is no market for it at that time or that property prices have put you into negative equity. A short period of this would increase short to medium term debts but a prolonged period of a couple of years would see many repossessions and bankruptcies (which further increases the downward pressure on house prices).

It's at that point that you get the smart money buying up the properties again.