Pension versus Buy To Let

lisyloo

jamesd wrote: »

BTL has one big advantage: leverage via a mortgage. A couple of smallish properties mortgaged at 60% LTV, say.

Smallish properties means smaller capital gains per sale which can be convenient. And the lower the price, the more properties you can buy to increase diversification.

Just for balance the downside of more smaller properties is that you have more boilers, insurance policies, contracts, tenants.

justme111

Plus the type of tenants for cheaper properties is not exactly the most reliable noce to deal with

Terron

lisyloo wrote: »

Just for balance the downside of more smaller properties is that you have more boilers, insurance policies, contracts, tenants.

You can get insurance policies that cover multiple properties, and they are cheaper than multiple individual ones.

lisyloo

Terron wrote: »

You can get insurance policies that cover multiple properties, and they are cheaper than multiple individual ones.

Ok, but the point still stands.
All of the appliances that can go wrong are multiple.
The tenants are multiple which is both a pro and a con (if 1 out of 10 doesn’t pay the rent that’s a 10% loss not a 100% loss in rent which is a pro’.

I’m sure you’d agree that each individual town/property has to be worked out individually as there is a lot of variance in prices, demand and types of tenant.

I prefer the risk and tax breaks of pensions which you can choose to do very little with if you want (either IFA or DIY).
I know you can delegate management of properties too but the rates are different.
DIY investments - from 0.2%
IFA - around 0.5% on top of fund/platform charges
Property management - 8%-10%??

You might be able to change the figures a bit, but it’s a different order of magnitude. Yes you can DIY that too if you have the skills and time and are happy with the risks. Not everyone has the skills/time/inclination for DIY or either option.

Each to their own.
The tax breaks make it a no brainer for me.

Durban

What about both?

Purchase the BTL. Put any rental profit after costs into a pension.

Can be good if viewed as long term.

As jamesd said above , the big advantage to BTL is the leverage.

Having said that, BTL is nowhere near as attractive as it once was and is only going to get worse

Terron

lisyloo wrote: »

Each to their own.
The tax breaks make it a no brainer for me.

My point is that you are exaggerating the problems of BTL. For example, despite paying management fees of 7% to 12% I get better returns from BTL just from the rents. Add in the capital gains and BTL is doing much better, more than making up for any tax relief (which would not be high as I am a basic rate taxpayer).

Still I recommended a pension in my first reponse in this thread (unless the OP has more than £40pa to invest).

steampowered

Terron wrote: »

My point is that you are exaggerating the problems of BTL. For example, despite paying management fees of 7% to 12% I get better returns from BTL just from the rents. Add in the capital gains and BTL is doing much better, more than making up for any tax relief (which would not be high as I am a basic rate taxpayer).

What do you reckon is your annual return on capital?

Thrugelmir

Terron wrote: »

Add in the capital gains

Which will be taxable at the point of realisation. Trouble with property is, improbable that you will only sell part. Which could potentially push you into a higher rate tax band.

Terron

steampowered wrote: »

What do you reckon is your annual return on capital?

For the last year I have the numbers I was making over 8% net whilst my pensions were making about 7%. Of course I am paying tax on some of the rents (overall rate around 10% marginal rate 20%). I could increase the return from the BTL by using a higher LTV- currently under 50%.



Then there is how much cpaital growth has increased my equity. I estimate 10% over the year.



But then there is the capital growth on the properties. One came to the end of its fixed term this year and when I looked at it I found it was now worth £180k though I paid £127.5k three years ago. I am remortgaging it based on the higher value and am using the money released as most of the deposit on another property. The money I get by remortgaging is tax free. The new mortgage will be for more than I paid for the propery in the first place, so future returns from that property could be considered infinite (depending on how you calculate it).

Terron

Thrugelmir wrote: »

Which will be taxable at the point of realisation. Trouble with property is, improbable that you will only sell part. Which could potentially push you into a higher rate tax band.

Not necessarily. If instead of selling you remortgage for a higher value you can realize the value tax free.Yes you are still liable to CGT if you sell, but like income tax on pensions it is deferred. It you never sell the CGT liability goes away on your death and only IHT applies, which is reduced by the mortgage debt. There are aeveral books explaining how to do this.


It does not work so well in the North where most of my properties are as capital gains have been rarer and rents are a higher proportion of the income.



It also does not work so well with the reduction in mortgage interest relief. Indeed some people who had taken it to extreme levels have found themselves in trouble. Their tax bills have increased, but they are unable to sell as they haven't left enough equity in the property to pay the CGT. So they are relying on capital growth to pay their taxes, and that has been less in some areas.