Help: Buy-to-let as a pension

macca1974

It sounds like quite a good idea to me to be fair if you are happy being a landlord. As well as understanding the exact numbers a bit better, the other thing to be aware of is what happens if you get a Tennant who doesn't pay for 6 months and you have to evict and also what happens if you can't rent the flat out. To be fair, I imagine that a flat of that cost is unlikely to be empty for long, but you should probably do some scenario planning to see if you could afford say a doubling in the interest rates and 6 months without rent. Unlikely, but worth "stress testing".

The big difference between this type of idea and a pension, is that you are borrowing to invest. So regardless of what happens to the value of the property you will still have to pay the mortgage back. Again, if it is affordable, not really a problem as you will always have an income producing asset which is what you want.

FBaby

Are you sure about your rental potential? Seems quite high for a £125K property if you take void periods into consideration.

xiledlanc

FBaby - there are a couple that are on the market with sitting tenants that give an income of around £8,500, so I suppose I have assumed that there will be full tenancy but with an agents fee once a year.

Might be a little optimistic - but we have had another rental property in a similar area for around 5 years, and only once did we have a gap between tenants (it fell over the Christmas period).

Being honest, whilst there might be a few tweaks on the figures, if the cost per annum was £2k per property, and we got 4 of them - then a £8k per annum pension contribution for a 4 x rental income of £32k (before running costs) would still seem OK.



From all the posts, it seems that I need to do a bit of work to sure up confidence in the numbers and that the return might be a little less, but overall the idea seems to hold water and we haven't missed something significant.

The other aspect not factored in, is if there is any growth / fall in the property markets - but then there is always an element of risk.

Pixie5740

xiledlanc wrote: »

FBaby - there are a couple that are on the market with sitting tenants that give an income of around £8,500, so I suppose I have assumed that there will be full tenancy but with an agents fee once a year.

What agent's fee once a year? Are you talking about a renewal fee?

Rather than buying flats could it be a better idea to buy houses instead (I know this would probably mean less properties though). Freehold being better than leasehold.

xiledlanc

Agents fee - the presumption that I will need to pay for someone to find and vet new tenents.

You can buy houses for a similar cost in nearby areas - but less rental income.

booksurr

you say your wife is self employed.
Will she carry on her business and if so how much taxable profit will she be making per year?

for tax relief purposes any money she pays into a (formal) pension fund will get tax relief, so if she pays in £800 her pension will be credited with £1,000 (£1,000 = 100% so 20% tax on that would = £200). If she is a higher rate taxpayer (ie taxable income >32,000 pa) she will get 40% relief on her contributions (I have somewhat simplified that statement!)

so her rental income needs to be better than the 1,000 before tax in order for the property investment to be more favourable than paying into a pension fund.

since you propose to take a repayment BTL mortgage (a rare beast these days, just because you can get a website quote does not mean they will offer it to you) only the interest payment element is allowable against her rental income so :

8,000 gross rent - 1,000 maintenance costs etc = 7,000 taxable
at basic rate she would then pay 7,000 x 20% = 1,400 - (interest costs x20%) = net tax payable. So your estimate of 1,000 tax is not far off as long as she remains basic rate.
Trouble is you then still have to pay the mortgage which, on your figures, leaves you cash negative, since the mortgage will be around 7,000 pa thus leaving you £1,000 pa cash negative

so your investment proposal is

a) BTL, pay around £1,000 per year on the basis that in 25 years time the 100k loan will have been paid off (at a net cost to you of £25,000) and any capital gain will be icing on top. That icing will of course be reduced by CGT - currently payable @ 18% and 28% depending on final size of gain and income for the year in question)

or

b) pay into a pension fund using money from non rental sources. That of course depends on where that money is coming from eg. self employed profits?

it is a chalk and cheese comparison....

Kynthia

Will your wife be able to get BTL mortgages in her name with such a small income? Have you calculated tax accurately as only mortgage interest and not the repayment element is an allowable expense. What about flat service charges and ground rent over the years, plus the need to extend the lease during your ownership as all that will reduce your profits from this? Then have you factored in CGT when you come to dispose of the properties to release your income to pay for your retirement as I'd imagine the gain would be significant in that time? Flats don't always have long-term tenants so most landlords only assume occupancy and rental income for 11 months a year to put an allowance for voids and tenant find fees, so what happens when you do this? Then there's the fact the government seem to be playing with tax to make btl less attractive to new landlords, therefore there may be new disincentives coming. Plus putting all your retirement savings in property isn't diversified and leave your future vulnerable to the swings in the property market.

How much do you need for your retirement and have you done much number crunching to compare a pension with your btl plans? Pensions gain tax relief on the way in plus you usually get 25% of the balance tax free and draw down the rest when you have no employment income so therefore can use your tax free allowance. Then you hope to invest in a diversified portfolio which will give a better return than savings accounts. The longer you invest the more your returns compound. Perhaps speaking to an IFA will mean you can get an idea of how much you could get depending on how much you pay into one.