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Should You Invest Your Pension Pot In Buy To Let?

shutterstock_157980962Thousands of UK pensioners have been able to access a lump sum from their retirement funds after the Chancellor, George Osborne, announced pension reforms in 2014.

With a recovering housing market and growing demand for rental property, many have been tempted to invest their cash in Buy to Let. But is this really a good idea? Read on to see whether Buy to Let could be right for you.

The Advantages of Buy to Let
Many people have decided to invest in Buy to Let because the market has been particularly strong in recent years. In the last decade to 2012, property data company IPD reported an annualised return of 11.2%, compared to 5.1% from equities and 7.6% from bonds.

Due to a nationwide housing shortage and issues of affordability in London and the South East, it seems likely that the UK rental market will continue to grow for years to come, making Buy to Let a sound investment.

A Buy to Let property has other advantages over alternative investment options. A house or flat is a tangible asset that you can pass on to your relatives.

At the same time, Buy to Let offers investors two income streams: an annual income from rent and a capital gain as the property increases in value. With the right property in the right location, your investment could offer you great returns.

Consider Your Situation
But before you get carried away with the dream of a Buy to Let property empire, consider your own financial situation.

While you might be able to withdraw a lump sum from your pension pot, will it be enough to cover all the expenses associated with buying a property? Do you have another income stream to support you through the buying process?

Remember that a Buy to Let mortgage is more expensive than a residential mortgage. The interest rates for Buy to Let mortgages are usually higher than for residential mortgages and there is a minimum deposit of 20% of the property’s value.

Just like residential mortgages, a deposit of 30-40% LTV will enable you to access the best rates of interest. Buy to Let mortgages also have higher arrangement fees, with costs ranging from £1000 to £3500 for a £100,000 mortgage. There will also be the usual solicitors fees, stamp duty and other legal checks.

If you are lucky enough to have the cash to buy a property outright, you can save a lot of money.

shutterstock_157980941Advance Research Pays Off
If you can cover all of these additional expenses, the first step to take will be to find a property. Take the time to do some research on the kind of tenant that you want, and the type of property that they are looking for.

Students will want to rent a room near their university, furnished with basic furniture and with access to a kitchen, living room and bathroom.

Young professionals often look for a smart, well-designed flat close to good transport links, entertainment and amenities.

Families are likely to want an unfurnished house with a garden in a quieter area close to good schools. All of these options have their advantages and disadvantages – choose what best suits your situation and budget.

Know Your Market
Once you know what kind of property you are looking for, find out the market rent for the area you hope to buy in. Bear in mind that your tenants will pay more for a good location and easy access to the amenities that they need on a day-to-day basis.

Compare market rents with property prices – will a market rent cover at least 125% of your mortgage? If not, consider another location or property type.

Once you are ready to buy, contact local estate agents and auction houses and look for properties around your preferred location and budget. Many properties are offered below market value at auction, although sometimes they need additional legal checks and maintenance.

Remember the less you pay, the higher your rental yield, so keep a cool head and bargain hard. This will determine the success of your whole investment.

Consider Additional Expenses
Once you have bought a property remember you will have to prepare it for tenants. This means you will incur expenses related to decorating and furnishing the property, arranging for maintenance to be done and for safety checks to be carried out. You are legally required to do this before you let the property.

How Involved Do You Want to Be?
Once everything has been prepared, you will need to advertise your property for rent and arrange all the legal aspects of the tenancy. Consider how involved you want to be with running your property.

Many landlords opt to use a letting agent to find tenants, arrange contracts, handle deposits, arrange an inventory and sort out day-to-day issues such as inspections and maintenance. It could save you a lot of hassle. Typically, agents will charge 10% of your rental income, plus any maintenance costs.

If you live near your property, you might decide that you would prefer to do all of this yourself, but bear in mind that being hands-on can take quite a lot of time and often involves being available in the evening and at weekends.

In addition, you will need to know your legal rights and responsibilities as a landlord, such as placing deposits in a government-approved deposit scheme and making sure repairs are carried out quickly and to a good standard.

If you know any landlords, ask them about their experiences to get an idea of what is involved. Disasters are rare, but can be expensive to fix.

Remember Insurance and Tax Arrangements
Once everything has been arranged, it is a good idea to obtain landlord’s insurance to cover any unexpected maintenance issues, problems or legal bills. This can give you peace of mind and is relatively inexpensive.

It’s also important to remember that your rental income is taxed at the same rate as other income steams. You will have to declare it to the taxman and the rate it is taxed at (basic or higher) will depend on your annual income overall. The good news is any money you spend maintaining your property is tax-deductible.

Still Interested?
Bearing all of this in mind, would a Buy to Let investment suit your current circumstances? Be honest with yourself. If you are still interested, make sure you know as much as you can before you buy. Good luck!

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