OPINION: Do the numbers still stack up for private landlords?
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Discussions regarding personal pensions have dominated the investment landscape for several years. Indeed, regular readers will know that it’s a topic frequently aired in this column, but simply having a pension doesn’t necessarily confer absolute financial security upon the beneficiary.
Theoretically, pensions enable us to voluntarily withdraw (retire) from the workforce and spend our time doing those things we’ve yearned to do for years. This begs two questions: first, why wait until you’ve clocked off for the last time before you start doing what you’ve really wanted to do for ages? Second, what if you’re completely satisfied with what you do and don’t feel compelled to retire? There are many people in their sixties, for example, who enjoy their work and so delay retirement.
There’s an equally large cohort keen to enjoy their post-pandemic, post-retirement lives at the earliest opportunity, hence they prefer a clean break from work. This is entirely understandable. After all, if you’re going to ‘do’ Australia, take that road trip along America’s Route 66, explore the Far East, head off on a worldwide cruise or refurbish that cottage in the Dordogne, it’s a tad difficult to simultaneously hold down a job.
There is, of course, a catch. Retirement can be expensive, especially in the early years when we’re comparatively fit and healthy and capable of swanning off to the far corners of the Earth. Very few older folks have sufficient financial resources to ensure they can spend great tracts of their retired lives hopping on and off planes or gigantic cruise ships – and why would they? Travelling, even in luxury, can be tiring and extraordinarily expensive.
More pertinently, even a combination of state pension, savings and a company (or private) pension may be insufficient to cover the cost of our most ambitious retirement plans.
Ah yes, ambitions. As anyone disappointed with the parlous return on their savings over the past decade would confirm, some of their most ambitious plans have had to be shelved indefinitely due to the dearth of opportunities providing a combination of reliable income and capital growth. Yet while they might be scarce, they do exist.
Addressing this matter, an editorial in Investors Chronicle suggested that “while the rules of the game have changed, it still makes sense to invest in buy to let… [because] direct property holding allows investors to diversify their overall portfolio”.
Investment property, the magazine continues, “is a long-term, inflation-linked source of income that is theoretically uncorrelated to more traditional asset classes”.
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The majority of existing and would-be property investors are realistic and accept what might be called ‘the cost of doing business’ i.e. rental voids, overheads such as insurance and occasional unexpected costs. Over the past few years those costs have escalated as the UK’s tax regime has become openly hostile towards the private landlord. The application of a crippling additional stamp duty typifies this.
As recently as April 2016, the Stamp Duty payable on a buy-to-let (BTL) property bought for £325,000 was £6,250. Since then, the rate of duty has risen by more than 155%, meaning that today, private investors must hand over £16,000 in stamp duty when buying a property for £325,000, an effective tax rate of 4.92%.
On top of this, it is no longer possible for landlords to deduct the cost of mortgage interest from rental income, so reducing their taxable income, while the Labour Party is said to be considering introducing ‘right-to-buy’ legislation for private tenants who could acquire their rented property at below market value.
So, is being a landlord actually worthwhile? For many, the answer remains a resounding ‘yes’.
BTL numbers possess a tantalising appeal for income-seeking investors. It’s perfectly possible to buy properties costing £325,000 with established rental yields of 5.25%. Investors looking for a combination of income and capital growth will recognise the attractions of supplementing a sizeable cash deposit with a low-cost loan. In this instance, a £225,000 mortgage repayable over 25 years would cost around £11,800, leaving an annual rental surplus of £5,200, enough to boost pension income and enjoy a couple of well-earned holidays a year.
A few weeks ago, I wrote about the importance of establishing achievable investment plans for 2022. Property values could plateau this year, which means opportunities could arise for income-seeking investors that offer a viable investment alternative for people who are committed to supplementing their pension and enjoying retirement to the full.
For more financial advice, check out Peter Sharkey’s regular blog, The Week In Numbers.