Blog Post 8 – Isn’t Property Risky? – Buy-To-Let (5 of 7)

"90% of all Millionaires become so by through Real Estate"

Andrew Carnegie

I believe this quote is somewhat misleading but I think the deeper point it makes is quite true. It was uttered at a time when investor opportunities were a lot more limited (early 20th century), and property was one of the few well-established options to generate an alternative stream of income. Moreover, the fact that the word “millionaires” was used rather than “billionaires” is a sign of the times. According to Wikipedia, we now have over 2000 billionaires in the world, a number of which you would not associate with real estate e.g. Jeff Bezos (Amazon), Mark Zuckerberg (Facebook), Bill Gates (Microsoft) etc. Furthermore, the statement does not address the proportion of income that comes from property. Maybe these millionaires have investment portfolios of which income from property accounts for only 30% of the total amount. Nonetheless, it is clear that whatever a wealthy person’s or businesses income is, it is likely that property accounts for some if not a significant part of that wealth e.g. McDonalds owns all its restaurants and rents them out. You may think it makes most of its profits from selling hamburgers but you’d be wrong.

Anyway, on to the topic at hand.

This property and cash generating strategy (Buy-to-Let) has been a mainstay of British culture for a number of years. And in that time consecutive governments have imposed numerous regulations on landlords that have slowly reduced the profit margins that made it so lucrative in the past. There is no doubt that there is still money to be made from buy-to-let, but for the accidental or in-experienced landlord, this may be difficult to realise.

The biggest change is Section 24. I hear you shudder. For those of you that are unfamiliar with the implications and are a higher rate tax payer, prepare for your next self-assessment. 

Prior to Section 24, interest repayments on loans (that includes mortgages) were deducted from turnover before tax.

No more.

The impacts are huge. For a complete lowdown on how this might affect you, read our post titled SA Tax Benefits – Section 24 (Part 2 of 7). All-in-all, this has led to a massive decrease in net profits. Some landlords will be lucky to maintain positive cash flow on a monthly basis. Even if you are still in the black after taking into account this change, you may just be one broken boiler, bad tenant or voided month away from a massive headache. There just isn’t the wiggle room for many personally owned buy-to-lets anymore. 

However, some of the old benefits still hold true. Capital uplift in the property is still a great opportunity to get a return on your investment. UK house prices double in value every 10 years on average. The important word there is “average” so investors should be wary that although their property could go up in value, it may also go down. A big factor for this depends on your area of investment. 

Yet, even more-so than a savings account, your money is still tied up and it’s certainly not as easy or quick to pull it out if you need cash quickly. You can achieve this by either re-mortgaging or selling, if times get tough. However, but be warned if you are in negative equity.

Property historically has served those that aspire to wealth creation very well. Just over 25% of Britain’s top 1000 wealthiest individuals have property as one of their main sources of income. You can be sure that the majority of those others in the top 100 will also have some of their investment in property.

Why? Because beyond the hype of the media, property prices remain stable. It’s tangible, it’s value is in the bricks and mortar and not an idea in someone’s head. It can provide regular income even if house prices fall (rent rates are not directly affected). It cannot be stolen unlike intellectual property. Even when a building becomes derelict, the land on which it sits on can still hold value.

It’s basic supply and demand. There are more people in Britain due to us living longer, more babies being born, more divorces and solely owned properties than ever before and not enough houses being built. This is perfect for a renting market. This is a trend that has been continuing for some time and despite calls for change by MPs, to rectify the situation, nothing appears to be able to stop the cycle. 

Another great benefit of being a landlord is that the income is passive, if you have a good agent managing the property. Despite cash flow being low, you are still earning money while you sleep which puts you one step closer to not having to work until you die. The only problem is you may need 10-20 buy-to-lets all working smoothly before you can sack the boss.

One negative aspect that often comes up regarding BTL is tenant issues. A couple of months without rent will not go unnoticed as the profit margins are reasonably small compared to other property alternatives. Two months is a recoverable position, however, months on end with no rent income due to voids and accompanied with maintenance costs can make landlords feel as though they are drowning. In fairness most places within Edinburgh would appear to be immune to prolonged void periods given the demand is so high.

There is a reasonable amount of risk in buy-to-lets on the cash-flow side of things. Even though the underlying value of the property remains positive, without proper analysis on the feasibility of a property, many would-be landlords may find themselves stepping into difficulty. Particularly those landlords that have intentionally or otherwise banked on low mortgage interest rates that are unprepared for rate rises or are unfamiliar with Section 24.

In the grand scheme of things, buy-to-lets can be one of the most dependable sources of income available to you. So long as you plan for the worst, you won’t receive any surprises. The downside is that it can take time to scale a reasonable portfolio and generate some serious money. It is no wonder that most landlords in the country have only the one second property.


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