Should I buy to let - any advice appreciated

tubster

Hello folks
I'd really appreciate some advice on thinking through my options. I am married with two young children. We live on a houseboat which is worth about £80,000, and we don't owe money on it of any significance. Mooring fees and maintainance cost about £4000 a year, but council tax is covered by that. We like the lifestyle and are keen to stay on it for around five more years, until the children get to secondary school age and will need their own rooms/space, so at that time we would want to buy a three bedroom house, probably where we live in the South East where three bedroom houses go for around £200,000 at the moment. We live in a town which is an easy 40 minute commute to London; the rental and buying market seems to be fairly stable. Prices have gone up consistently for 10 years, but who knows what will happen next.

We both have jobs paying 15 and 30k, although the 30k one is a one year contract. Our savings are £45,000 including absolutely everything; this is all in isas and savings accounts at the moment as I have not been sure when we might need it up to now. We think we can save at least £12,000 a year.
We have a pretty clear financial goal, which is to try and make sure our savings keep pace with, or exceed the local 3 bedroom house market.
One thought is to get a buy to let mortgage (3 bed houses rent at about £850, which would just about cover interest only mortgage if we put £30K down on it). We could meet additional costs out of our own income. This would tie us directly to the market we want to enter later. If prices fell we could be in trouble, so buying a house that we could move into would allow us to ride out a crash. If we could find a house that we actually like we could move in in 5 years time, avoid the buying costs at that point and re-mortgage to a repayment or offset mortgage.

Another option is to buy to let a flat, possibly in a distant town with better prices. This would involve less savings and less risk, perhaps, and we could invest the rest elsewhere to spread our risk. With a short term aim, we are trying to find the less risky end of the investment spectrum.

We could decide to buy to let, but wait to see what happens in July when the new buyers packs come in, and keep an eye out for a really good deal - we are in no particular hurry, which might be a good advantage.

Another option is to invest some of our savings in unit trusts or even property company shares, maybe balancing them with an industry or commodity that does well in a property downturn (not sure what that might be) in the hope that the investment would outpace any more property price rises.

Finally we could sit tight and keep on saving, and buy when we sell the boat in five years time, and hope that prices stay below the 5 to 6 per cent we get on isas etc and we won't be priced out of the market.

I haven't bought or even rented a house for decades so I feel like this is a pretty momentous decision; I would really appreciate any comments (or votes!) you have about the most sensible thing to do.

Tubster

[Deleted User]

You wont make any real profit in the short term as the rent may not cover the whole mortgage.

However... House prices go up by about 8% each year and there arnt many svings accounts that can match that. So id say its a kind of neutral investment at the moment providing you make sensible decisions and do your research.

dunstonh

Growth on the capital value gets hit with capital gains tax at the end so upto 40% of that could go in tax. So, if you do assume 8% as an average, you may end up only getting around 4.8% after CGT is paid.

Plus the risks of borrowing to invest in an asset that is well above the long term average price are quite high.

Only time will tell

tubster

thanks yant and Dunston H.
I didn't consider capital gains tax. Forgive my ignorance, but if you put down 30K, sell the house for say 280k (80K profit) five years later, am I right in thinking we would pay CGT on 71K that year (@9K allowance that year) or would it be CGT on 45K (5 years x 9K allowance, if no other investments). I'd be buying jointly with my wife I think - so would be be allowed 2 x 9K allowances for each year? This would would mean no CGT.

At the moment and am leaning towards sitting it out and building savings. Read a few property predictions from the papers that say it the market will flatten out to 4 per cent a year next year and the following few years; this would be an awful lot of effort for that... any other thoughts anyone?

Tubster

[Deleted User]

you can avoid cgt by living in the house just before you sell it apparently.

tubster

Just had a look into this - it seems that you can get 3 years relief from CGT if you live there at any point, plus the time you live there. So if I rented it out and lived there afterwards for, say, two years my CGT would be 2/7ths of the profit on the house; so if it goes up by 5-6 per cent a year the profit would be 70K on a 200K house... 20K would be liable for CGT, but my CGT allowance and my wife's would mean that @17K of this would be exempt, leaving 3K liable for CGT... only guessing of course, anyone know anything about this?!
Tubster

Jim_B_3

tubster wrote: »

We live on a houseboat

Wow, a houseboat! Way cool!

Deleted_User wrote:

House prices go up by about 8% each year

Can't last without wage inflation cancelling it out. If it did, pretty soon nobody would earn enough money to buy a house.

jamesd

Your timeline is likely to cover the duration of any dip in the market so your plan to link yourself to the market with a BTL and a tenant covering at least most of the mortgage amount looks reasonable.

You're saving 12000 a year and that makes the ISA allowances you have accumulated valuable to you long term. If you're using stocks and shares as well as cash this matters less because your savings are below the limit and you may be able to build up the size again. It may be worth using higher LTV and lower deposit or delaying until you've saved this year enough to cover the deposit without using any money from prior years' ISA allowances.

Savings income from the ISA isn't taxable while surplus of rent over mortgage is taxable, so getting the income in the ISAs beats getting it from rent.

[Deleted User]

Jim_B wrote: »

Can't last without wage inflation cancelling it out. If it did, pretty soon nobody would earn enough money to buy a house.

You say that, but it does - http://www.fool.co.uk/school/2006/sch060410.htm

I guess some people have more income then their wage, eg stoozing, saving, swapping bank accounts, minimising utilities, renting out rooms, fixing other peoples computers, golden handshakes, bonus' , consultancies/own business paying dividends - tax minimisation etc.

EdInvestor

Given that you live on a boat, not in a house, it would be worth checking with the Revenue if you can buy a house and still count it as your principal private residence even while letting it out.If so, there would be no CGT problem.

In general the idea makes a lot of sense as a hedge against yet more property inflation when you know you have a pretty precise future need.

As an investment strategy BTL is much less attractive than it was, and it's particularly unattractive for people who are already involved in the residential property market via their own home as it leads to 'eggs in one basket' syndrome.

But that is not really what you are doing in this case.

teddyco

Tubster,

The buy-to-let market in the UK is flooded as more and more folks rush to an investment that they believe will save them in retirement, and warning bells have been ringing for a few years now about a property market crash.

The market at the moment is held up by a huge demand for property and not much being built and that has over-inflated costs in the UK. This is dangerous because if our government allowed for more building on green belt land, which is very possible, the market would be flooded with new homes and the folks in the buy-to-let market would be left holding the bag.

My advice, if you are interested in property as an investment, is to seek opportunities within the EU for buy-to-let; i.e. Tuscany, Italy, or Paris.

I would avoid Florida as it is currently over built, and might take several years to re-cover, but Europe offers some very interesting growth potential as the EU welcomes new countries.

The feeling that I get at the moment about the UK property market is the same that I got with the tech bubble of 2000. When everyone boasts about all the money they are making, it's time to get your hat and coat and leave the party.

Just something to consider.