Buy a flat or invest small inheritance? Post Reply

[batandball]

Morning everyone. I am hoping that someone in the know will be able to help.

We have been left a little bit of money and I was thinking that we could buy a flat, possibly because I have flat envy, happy to acknowledge that. But I did think that long term it could be income in our retirement, once the mortgage had been paid off.

My husband is saying that he thinks it would be better invested. Less risky and no capital gains if it goes into pensions.

Would anyone be able to offer any insight into whether buying a flat is a good investment. Appreciate that no one hads a crystal ball

[sconesplease]

If you go ahead and buy a flat, I would look carefully at the numbers, taking into account property management fees (unless you self manage) insurance and ongoing repairs and maintenance.  Keeping in mind, that if and when the tenants move out, in my experience there will be more maintenance needed that was not noticed at the time inspections were undertaken. I would also think about what type of tenant the flat will appeal to, how close is it to the tube, train and supermarket, vacant periods in-between lettings etc where you won't be earning rent, and the tax you will pay on rent received. And then think about the re sale process, who would the flat appeal to, is it leasehold or freehold, any vacant period while waiting for the sale to go through etc, stamp duty. Is the flat going to go up on value, could it go down? Who are the neighbours? are the neighbours renting also?  I recommend finding an excellent accountant.

I don't want to put you off as buying a investment property can be great but we have a couple and over the last few years and it has amazes me, even with good tenants if you want to keep it in tip top condition, how much work, expense and sometimes stress they have been.  We had a great tenant living in our three bed house, he kept the house immaculate and kept us up to date with any issues that needed attention. When he moved out, we spent 3.5 days, working on the house and spent £4,000 on a few rather small things that quickly added up.  We saved on property management fee's by self managing, but the downside of not having a property manager is that you may develop a relationship with the tenant and it becomes harder (for us!) to put the rent up because you feel like you have a friendship. We have had lots of tenants and never had any serious issue but we did have one couple of caused a fire in the kitchen, they had taken the batteries out of the fire alarm, luckily they asked to break their contract and move out. We have also had property managers organise work on the house (with a 10% additional charge) and we have noticed later down the track that the work hasn't been completed to a high standard, and in once instance they hadn't finished the work but had charged us for it. Property managers also seem to come and go, so who you may be dealing with is likely to change and they won't have all the history of what has happened prior (they will have the notes but they may be managing 80 plus properties on their own) 

Best of luck with what you decide on, this is only my experience and I'm sure others will have had more positive experiences but I am very much over property investment at the minute. Although in saying that, Manchester seems to be very good value!! We have rented out our family homes so it's a bit more emotional than if you are buying solely for an investment.

[ACRSW18]

Hi - I have some recent experience of this as I recently sold my buy-to-let place in Balham and also am an IFA. In short, an investment property does not tend to be tax efficient largely due to extra stamp duty, income tax and capital gains tax upon sale. Amateur landlords have always relied upon capital gains as a large component of returns - not sure that is guaranteed given current (London) price levels.
As your husband states, pensions can be more tax efficient but this is locked away until retirement, what if you need it before then?
There are other options available.....I would be happy to discuss this, please drop me a line and we can arrange a complimentary chat: andrew.rankin@westminster-wealth.com

[Greyskies]

I think the days of making any money as an amateur landlord with one property are long gone. It always depended on property price inflation and my guess is that that is over in London for the forseeable future. 

Unless they live very locally and have a lot of time on their hands, most amateur landlords need an agent to vet tenants, collect rents and keep on top of the ever changing legislative requirements: gas safety, electricity safety, CO2, Legionnaires, Smoke alarms etc. 

Looking forward you can also factor in local authority licences for landlords and escalating insurance costs.

If you have an older property there will be an endless list of things to repair. Unless you have a strong connection to a reliable local builder you will end up using the agent’s contractors who will do a substandard job at an inflated price.  Obviously a new build with a guarantee would avoid this. 

Add in tax at basic rate or more likely higher rate if you are both working  - and you can wave goodbye to at least 50% of the headline rental income…. and that is without void periods or rogue tenants.

New requirements to allow pets and remove “no fault eviction” grounds will increase overheads. You then have to look at stamp duty on a second home and capital gains on disposal.

You will get a similar return on your capital with zero risk and zero stress by investing with NSI. You can make a lot more more if you are prepared to take some risks. 

[Lola123]

Hi, can you buy the property and put into your SipP? We have done this with land and it seems to work well.

[JJ1975]

As a rough guide, to make the numbers work you need minimum 7% gross return and self-manage, which means buying locally. Openrent is a useful portal as it’ll advertise your property on Rightmove / Zoopla for around £30. Joining the NRLA is a vital resource and you can get all the legal documents and processes laid out for you.. you can also call them for specific advice. Cost is about £80 a year. You should also be comfortable completing your own tax return - it’s rather easy once you’ve done it once, the HMRC portal guides you through it.. build a basic spreadsheet with your costs and keep it up to date through the year, taking pdfs of all receipts.

The issue you’ll find is getting the 7% return.. the only real way to achieve that is a) buying ex-local authority which will give you less capital growth b) buying at auction (you’ll need to be 100% cash buyer and know what you’re doing) c) HMO

HMO is typically 5 or more in one house (council dependent) and to get the best value you buy a 3/4 bed property and be creative with the layout, ensuring you stick to the minimum room sizes (laid out on the council website). You get best rent by advertising individual rooms using spareroom etc.. it’s more work and once you classify a property as HMO then it can be hard to change it back, affecting its value.

If you have a full time job then all of the above can initially take time. You’ll need to want to do it and enjoy creating a good product with smart interior design that will appeal.

Also be realistic about what you can afford. A small inheritance may not get you far.. aim for a 40% deposit to get the better lending rates and lower your risk.

SIPP will he easier but you will still need to invest it in ‘something’.. bond returns are pretty good right now.. 4% is easy to achieve.. but no capital gain. If you’re stock picking, that can also be interesting but be prepared to lose as well as gain.

[LastMumStanding]

I can only speak from my direct experience. I have invested in both but I stopped adding to the private pension just before Covid . The levels of growth and income it can provide are nothing like what I’ve achieved with property. i started with. 1wx-council property 10 years ago. Now I have 4 properties in London and a gross income of 5k per month (it will be closer to 8k per month once the 4th is renovated and tenanted. I achieve returns of around &%. In the past two years I have signed over part ownership of 2 flats to my children making use of their personal allowances for tax efficiency and giving them security of income and places to live. And all of the capital invested (plus stamp duty and legal fees) is all still there - prices have risen to cover capital gains etc. people always say prices can’t go up anymore but then somehow they always do. Like all investments - it depends what you invest in - take advice, do your research, consider your own individual personal circumstances carefully and how those circumstances might changes in the future.

[dudette]

There’s a lady I know called Catherine Simmonds who runs a wealth management business called Mentmore Financial Planning. She has won numerous awards for her work and is very lovely so definitely worth a chat just to give you an idea of other options in the table.
https://www.mentmorefp.co.uk

[boonkoh]

I can only speak from my direct experience. I have invested in both but I stopped adding to the private pension just before Covid . The levels of growth and income it can provide are nothing like what I’ve achieved with property. i started with. 1wx-council property 10 years ago. Now I have 4 properties in London and a gross income of 5k per month (it will be closer to 8k per month once the 4th is renovated and tenanted. I achieve returns of around &%. In the past two years I have signed over part ownership of 2 flats to my children making use of their personal allowances for tax efficiency and giving them security of income and places to live. And all of the capital invested (plus stamp duty and legal fees) is all still there - prices have risen to cover capital gains etc. people always say prices can’t go up anymore but then somehow they always do. Like all investments - it depends what you invest in - take advice, do your research, consider your own individual personal circumstances carefully and how those circumstances might changes in the future.

My question would be - when was the last property you bought for your portfolio? If it was more than 4-5 years ago, I would agree... you would have seen good capital gains, you would have paid less stamp duty on that purchase, etc.

But buying now is a very different kettle of fish compared to buying 5 years, 10 years ago.

This is all subjective and open to opinion and personal circumstances, but for me the combination of high stamp duty currently, high mortgage rates, and the tax inefficiency of rental income for higher rate taxpayers doesn't stack up financially. Especially when compared to a SIPP, where you can buy REITs that are giving 5% dividends (tax free) as well as still capturing capital gains potential. All without the stress of managing a property directly, being able to buy/sell instantly, and getting a diversified portfolio immediately.

[SouthLondonDaddy]

The levels of growth and income it can provide are nothing like what I’ve achieved with property. i started with. 1wx-council property 10 years ago. Now I have 4 properties in London and a gross income of 5k per month (it will be closer to 8k per month once the 4th is renovated and tenanted. I achieve returns of around &%.

What is the total return you achieved on property, and what did you compare it to, in order to conclude it's better than other alternatives?

The GBP return of a stock market index like the MSCI World, which tracks the stock markets of developed countries, more than tripled over the last 10 years. https://www.justetf.com/uk/etf-profile. ... Y983#chart . Investing in it is very easy and cheap - it is straightforward to open investment accounts and use them to buy ETFs tracking this index or another one. The chart is, in fact, for an ETF tracking the index and reinvesting the dividends. More importantly, it's a buy and forget type of investments, without any monitoring nor drama.

You can save £20k per year per person in a stock and shares ISA (£40k per couple).

You get an annual allowance of dividends and capital gains you can receive tax free. Outside of these allowances and of an ISA, capital gains are taxed at 20% and dividends are taxed higher.

In a pension, instead, the capital grows tax free but taxation is deferred - you put money in pre-tax but get taxed when you access it at retirement.

If you had invested outside of a pension, mixing ISA and non-ISA accounts, your after tax return investing in the MSCI World would have probably been somewhere between 2.5 and 2.8 times, i.e. £100 invested 10 years ago would now be worth, after tax, between £250 and £280. 

What return did you make on property?

Even if you made a high return, what makes you think the conditions will be the same now that interest rates are higher and property prices no longer keep the pace with inflation? 

[SouthLondonDaddy]

OP, if you cannot model the returns of a buy to let under a few different scenarios, then you shouldn't be doing it, because it means you have no clue what would happen under a few different scenarios.

Modelling means putting together a very simple spreadsheet to calculate your returns taking into account all your upfront costs (stamp duty, lawyers, refurbishing, etc), your ongoing costs (letting agency, maintenance, vacant periods, etc), and looking at what happens under a few different scenarios (what if the property remains unlet for 3 weeks a year? What if you need to spend £2k a year on maintenance? Etc)

Also, many people tend to underestimate costs big time - both the upfront and the ongoing ones.
Eg let's say you buy a £600k property with a £150k deposit. You'll pay stamp duty of £35,500 and easily another £10k (probably more) between lawyers some light refurbishing furniture etc. So your investment wasn't £150, it was £195,500. It means the property must go up in value by more than 8% (e.g. 8.3% from £600k to £650k) just for you to break even (ignoring rental income), because:
if you sell at £650k, you repay the £450k mortgage and are left with £200k less the sale costs (lawyers, agency fees etc). You had invested £195,500. I say it must go up by more than 8% because if it goes up by 8% then, after paying for all the costs, you actually make a loss!