Buying a flat for investment purposes

scotnan

We had dinner with friends this evening and one of those ...."what would you do with a lump sum" conversations came up and ended up in a bit of a heated discussion so I wondered if anyone can help solve it.

Ok the main jist of it was, if you had this windfall/ inheritance of around £100 000 and instead of just leaving the money in the bs you decided to outright buy a flat (no mortgage involved) so that your investment would grow quicker than any interest you would gain by putting the money in a bs. But you didn't rent the flat out, only used it for when friends/relatives visited and let them stay there - you would still need to pay council tax on the property wouldn't you and also building insurance? So that would somewhat outweigh any gain you would make on the price of the property rising as each year you would be paying somewhere in the region of £1500 just as a figure.

It's not as hypothetical as it sounds as one of the friends was actually thinking of doing this, but his argument was that he wouldn't need to pay council tax on it as nobody was actually living there, but I think he would.

Anyone?

ging84

you would have to pay council tax, although it may be reduced.
there are many other costs involved which you have not listed and the property price rise is highly speculative, there is a reasonable chance there will be little or no change in value, or even a reduction.

£100k is investment level money, and anyone who really thinks this is a good idea and is not just trying to justify their desire for a 2nd home needs proper advice from a financial advisor, there are far more options for investing that sort of money than just putting it in a bank account or buying a flat which can be both safer and give better returns, and compared to buying and eventually selling a flat so much easier

tHomBleached

scotnan wrote: »

It's not as hypothetical as it sounds as one of the friends was actually thinking of doing this, but his argument was that he wouldn't need to pay council tax on it as nobody was actually living there, but I think he would.

Almost all councils changed the rules on non-occupancy from April 1st this year, meaning full tax was due. Even worse for your friend, they wack a 50% premium on it after 3 years to encourage you to use a home to actually you know...home someone.

As another poster has said, there's still some cash based investments that can achieve >5% that don't involve either losing money every year on rates/insurance or losing asset value (which unless your in London at this moment in time, is a possibility).

LeafGreen

with so many people finding it hard to find a place, I think the practice of buying a flat to deliberately leave it empty for personal financial gain to be morally wrong. at least rent it out, then the figures might have a hope of adding up.

Werdnal

Your costs for a vacant flat would include ground rent and service charges (if it was in a leasehold block), plus insurance, council tax, utilities, maintenance, TV license etc. Infact, if the property is long-term empty, insurance may be more expensive as insurers like occupied properties, rather than vacant ones!

Many councils used to offer a 6 month exemption for non-furnished empty properties, but this was abolished in April, and you may be lucky enough to get 50% discount for the first month, then it goes back to full rate.

Why on earth would anyone want to buy a property and not gain an income from it? The "investment" potential is earning rental income from the property, not the capital value that may increase over time. I have had my rental flat for 12 years (no mortgage), earning roughly £3800/annum in gross rent (that is without taking my costs and expenses off). This equates to a gross income of around £45K - but the property has not increased in value by that much, so leaving it empty is not a viable investment.

Also, the tenant is responsible for the CT and utilities, so one less cost to the owner!

Remember, once the value increases (if it does), selling it on would incur capital gains tax as it is not the owner's main residence.

Me thinks you friend has more money than sense ...

Cornucopia

Buildings insurance for flats is usually part of the Service Charge - it won't vary based on occupancy.

And if there are no contents, you'd probably have to consider going without contents insurance. (All it would pay out for would be kitchen units and curtains).

In the boom market, I expanded into 2 properties and ended up with a third BTL. In those days, it was a no-brainer. (There are Capital Gains exemptions for multiple residences that are relevant - but they don't apply if you've never lived in the property). So that would be another expense on the OP's scheme.

[Deleted User]

The days of house values doubling in a decade are long gone, salaries are not growing as much as they used to and people are already at the limit of the amount they can borrow for homes, if he's looking to make guaranteed money then renting it out is the correct action, leaving it empty will incur many costs that will out pace the increase in value (as Werdnal explained above).

Purchasing somewhere is probably a much better idea than leaving the money in a savings account but it's not going to make him rich.

Werdnal

Cornucopia wrote: »

And if there are no contents, you'd probably have to consider going without contents insurance. (All it would pay out for would be kitchen units and curtains).

If they are intending to use for family and friends to stay, I suspect it will be fully furnished, therefore contents insurance would be wise. I doubt the "guests" would be bringing sleeping bags and a camping stove!

scotnan

Thank you all for taking the time to reply I shall pass on your words of advice

G_M

The whole premise is based on the assumption that theproperty value will rise. It might, probobly will, over time. But there's no guarantee of a year-on-year rise.

There IS a guarantee of year-on-year costs.

Having said that, £100K in a BS is a waste, unless it is there as contingency and may need to be drawn on. Interests rates are pants, so it will not even keep up with inflation.

Sensible options would be:

* get a mortgage (to offset tax), buy the flat, but let it for income as well as the hoped-for capital growth
* spread the cash around (eggs /basket/ all....) is 20K in BS, 20K in bonds/gilts, 60K in equities

Next time, make sure you invite me to dinner too so I can keep you all on the straight and narrow!

Lord_Baltimore

I don't think your friend should concern himself too much with investment. When interest rates begin to rise (imminent) the whole pack of cards will come tumbling down with everyone taking a massive hit. Housing values, the welfare state, the NHS, pensions are all in for change of cataclysmic proportion.

The initial 'boost' for those with capital will be short-lived when the fiscal tsunami finally rolls in; yes, the real turmoil hasn't come yet.

I predict a riot.