October 5, 2021

Buy-To-Let: Debunking the Myth

by Victoria Bulgin

in Financial Planning Insights Lifestyle

If I had a pound for every time a friend, family member or client has told me what a brilliant investment a buy-to-let property is……

‘Well property always goes up in value doesn’t it. Plus, you get a monthly income from the rent’.

Let’s take the example of Joe Bloggs who came to see me recently. He’d inherited £350,000. He used £100,000 to clear his mortgage and he was planning to use the remaining £250,000 to buy a flat and rent it out.

If we strip back why Joe is investing his money, rather than just leaving it as cash in the bank – it’s to see those funds grow and to benefit financially from them.

In simplistic terms, he buys a flat for £250,000 and rents it out for £1,000 a month. Then in the years to come he hopes that flat will have gone up in value and he can sell it for a profit.

The problem is that buying a flat for investment is far more complex than this and the income and return is hugely reduced by fees and tax. Then there’s the amount of your own time you need to give. 

After talking with Joe, it was clear these were points he’d not considered. As a brief breakdown, once Joe’s found a suitable property he’d have:

• Agents’ fees and legal fees on purchase: circa £2,000
• Agents’ fees for finding a tenant: circa £1,000
• Agents’ fees for managing the flat: circa 10 – 20% of monthly rental income
• Insurance (building, landlord, rent protection etc.): circa £1,000 per annum
• Savings for repairs and renovations

Then our old friend tax!

• Double stamp duty (as he is already a homeowner): £2,500
• Income tax at 40% on the rental income (20% for a basic rate taxpayer)

The £1,000 a month rent drops to £600. This is assuming his flat stays tenanted.

When he comes to selling the property:

• Agents’ fees and legal fees on sale: circa £2,000
• Capital gains tax at 28% (18% for a basic rate taxpayer) on the profit

Another important point to consider is liquidity. Once this property is bought and rented out, Joe’s money is tied up. He doesn’t have the flexibility to access the funds if unexpected life events happen.

Also, very pertinent in today’s market is the myth that property always goes up in value. House sale prices in London have suffered the biggest fall for a decade.

Joe decided against a buy-to-let!

The information in the article is for illustrative purposes only.  Brighton Capital Management, Raymond James Investment Services Ltd nor any connect company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this article.