You hear it all the time. A relative or a friend has just inherited some money. They want to make it work for them. So they make what seems like an ironclad financial decision: they invest in buy-to-let.
Why is this so common? After all, property ownership is a relatively recent trend. Well, rental properties can offer regular income and, recently, house price growth has become notoriously strong. London property prices rose by 9.4 per cent during 2015, according to the Office for National Statistics, and by 6.7 per cent across the UK as a whole.
But there are arguments against investing in buy-to-let. Here are five that every would-be landlord should consider before making an expensive purchase.
Interest rate rises
Since 2008, many developed economies have grown used to near-zero, zero or even negative interest rates.
If – or when – interest rates rise, tracker mortgage rates will rise too. Buy-to-let landlords will need to be able to cover those higher mortgage repayments, either from rental income or from other income or savings. The Bank of England is paying close attention to buy-to-let mortgages: it fears that buy-to-let borrowers could be vulnerable to a rise in interest rates because of a lack of payment capacity. So potential buyers should ask: would my buy-to-let mortgage be affordable if the interest rate ticked up?
This time last year, Ed Miliband was worrying some Londoners with the prospect of a mansion tax. Labour lost the election but the Conservative government introduced its own housing market brake: a 3 percentage point rise in the rate of stamp duty paid by those who already own a property, effective from April 2016.
It is not clear whether the tax will cool the buy-to-let market or not. If house prices continue to rise over the coming years, it seems likely that we’ll see more policy measures designed to take the heat out of the market, and that means more expense for landlords.
Buying and selling houses is difficult and can take time
According to Rightmove, in February 2016 it took an average of 79 days, or more than 11 weeks, to sell a house in the UK. If you need to sell quickly – say, because your mortgage is costing you more than your rental income – the chances are that other owners will also be trying to sell at the same time, perhaps urgently. So selling might take longer, or the sale price you must accept might be lower.
By contrast, if you own stocks and shares, you know you can sell any weekday between 8am and 4.30pm (if you’re trading on the London market), within a fraction of a second, at a quoted price. There are 16,810,000,000 shares in Barclays circulating today – there will always be an instant buyer for your shares in a market of that size.
Property does not diversify
A financial adviser would probably not recommend investing £300,000 in a single stock – instead, they would recommend a balanced, diversified portfolio.
Spending one’s savings on a house is the investing equivalent of putting every egg into one basket. Buying a house to rent concentrates investment risk in a single sector of the economy – property.
Of course, rental income rewards the buy-to-let landlord. But houses aren’t the only investments that generate income: stocks pay dividends, and bonds yield interest income. Furthermore, few people can afford to purchase a buy-to-let without a mortgage – not needed to buy shares – and that entails interest payments which eat into the rental income.
Being a landlord is harder than you think
Being a landlord is often difficult and expensive, and hiring an agent to do it for you is a costly option.
A landlord must insure the property, pay for legal advice, hire estate agents to find tenants, pay for ongoing upkeep, redecorate regularly, and foot tax bills (stamp duty, capital gains). Do you know how to secure a gas safety certificate, install a carbon monoxide alarm, shift tenants who refuse to leave, or deal with tenants who damage the property? Becoming a landlord involves mastering all these challenges.