Is Buy to Let a good idea?
Is Buy to Let a good idea – great question; if only there was a quick answer!
As with all great questions, the answer perhaps has an element of yes and no, with a soupcon of ‘it depends’ thrown in for good measure.
In this post, we’ll lean towards ‘yes, it is a good idea’, but we’ll also outline the negatives and give some of that conditional advice too. What’s good for some people might not be so great for others; we all have different requirements and considerations.
So, without further ado.
It’s a good idea because… nothing much else is worth investing in
There is certainly some truth in this. You don’t need us to tell you what’s happened to interest rates in recent times, and how unappealing traditional bank savings accounts have become.
Other common options for investment are in stocks and shares and also kickstarter crowdfunding projects. Both these though can be high risk. Playing the market in a time of economic uncertainty can lead to great losses, similarly while some kickstarter projects experience huge growth and so reward investors with huge profits, many others go nowhere and suck up funds.
However, investing in buy to let just because other options don’t appeal isn’t the best of reasons.
Most landlords are making a profit from their single buy to let property, or their portfolio. Returns of 8 or 9% are to be expected, and double digit returns are common for investors who buy in the right area and at the right price.
Of course, headline figures can be misleading – they can be skewed by strong returns in some areas (London for example) which hide regional problems. This is clearly the case with house prices, London and southern rises showing monthly increases which simply aren’t reflected in every locality.
Which brings us to.
It’s a bad idea without your eyes open
Do not assume buy to let is a great idea just because it seems like everyone is doing well from their investments.
Official figures show that of landlords with a single buy-to-let property, 25% are either making a loss or simply breaking even. Yes, that leaves 75% who are making at least some profit, but can you afford to be one of the quarter it’s going extremely badly for? Property investing is not as simple as throwing money into it, with a return all-but guaranteed.
It’s a bad idea because the Government is attacking buy to let income
The November 2015 Spending Review has certainly concerned a lot of landlords and would-be landlords. Stamp duty changes make buying investment properties seemingly less appealing, while capital gains receipts on property sales will now have to be paid more quickly (though the amount has not changed).
Smart investors will, though, still find solid investment properties, and experienced buyers will take stamp duty changes into account when working out their figures.
The spending review changes may even work in the favour of some investors because…
At the House Crowd, we expect that the Government changes will actually help thin out the market, with the headline announcements putting some would-be investors off property.
This means that the level of competition will drop, and with it the experienced buyer will be able to benefit by picking up properties at a lower cost, thus more than negating those stamp duty alterations.
As with any investment, the experienced investor doesn’t just worry about the headlines, they think beyond it to what the changes actually mean, how people will react and what opportunities they open up.
You can read more of our thoughts on the recent changes in this dedicated post.
It’s a good idea because you have a tangible asset PLUS returns
Invest in property and you own something, a tangible asset in the form of the property which has a good chance of increasing in value.
This of course opens the opportunity of utilising this equity to buy further properties, or simply selling up and cashing in down the line.
Compare this to something like an annuity, where there is nothing to pass on and no tangible asset. Yes, the returns with an annuity are guaranteed, but they are likely to be lower than those offered by a successful buy-to-let purchase.
It’s a bad idea because the price to invest is so high
Clearly, investing in property does not tend to be cheap. Buying a buy-to-let property is going to cost tens of thousands even if that is only for the deposit on the mortgage.
However, to spread the risk most investors want more than one property – imagine the funds you’ll need to build a portfolio of five properties for example. You can look to start with one and then reinvest, but what if that one makes you one of the 25% who don’t make a profit? What if that one property suffers storm damage, or a tenant ups and leaves without paying – there is nothing to offset the loss.
In short, it generally takes deep pockets to be able to spread risk across multiple properties. This is where crowdfunded property investing opens up opportunities.
Investing with the House Crowd means spreading your investment across multiple properties with other investors. An investment of £50,000 could be split into five £10,000 investments on five different properties.
This is definitely true – you know what they say about a fool and their money…
If you’re buying a property as an investment you need to know as much about both the property and area as possible. Is it a locality with one main employer – what would happen if they left?
Or is development planned, is now the time to buy before a new workforce arrives, all in need of dwellings?
It’s a great idea with proper research
Proper research means you go in knowing exactly what rent is achievable, as well as what, if anything, is coming to the area. It could be knowing that some vacant retail spaces are about to be rented out and, if so, to which types of shops. What will that do to the locality?
Or is there a spread effect; are people moving out of an area which has become too expensive and with it moving into where you’re looking to invest?
There are sure to be exceptions, but we suspect a lot of that 25%, the investors not making a profit, fell down in their research. Many probably just invested where they felt comfortable, where they already live. However, while home might be where the heart is; it might not be where the money is.
Going it alone, the level of research can be daunting, especially to then not find a property or be outbid. Perhaps the crowd funded method is the way to go? Our properties are bought by experts who know the markets; all you have to do is invest, without trying to do that difficult task of finding exactly the right property.
After all that – is buy to let a good idea?
Yes, as long as you are aware of the risks and know the pitfalls.
Do your research and consider the alternatives. And if you are interested in sharing the risk by investing across multiple properties, please take some time to read about the House Crowd. We have an About Us page and also a list of common FAQs.
We wish you all the best, however you choose to invest.