Why Property?
In the UK, many people aspire to own their own property, and this is because the cost to rent a property is often very similar to the cost of owning a property in the UK. In other European countries, property ownership is not as popular, and more people do rent. There are advantages to both options. There is also a stigma attached in the UK with owning a property being linked to affluence. In reality, there are many reasons why owning a property may not be in your best interests, or alternatively, you simply may not want to own your property.
Owning your main residence
With interest rates at historic lows, and mortgages rates being similarly low, it is currently cost effective to own your own property, and pay a mortgage if necessary on a repayment basis to ensure that your property is owned outright by you in retirement. This will help to reduce your outgoings in retirement as you won’t have a mortgage to pay. If you live abroad, or will move around a lot for work, a buy to let purchase is an option other people consider;
Property development
Should you have the knowledge and expertise, the spare money and the time, then property development can be a lucrative business, as is regularly shown in ‘Homes Under The Hammer’, although it is not without risk. Often known as flipping, this is the process of buying a property in need of renovation or repair, and then completing the necessary renovation work with the expectation of either renting the property out, or selling it. Expertise is key however, as is knowing the market, the area you will be buying and selling in, and the costs associated with it. Some things to consider are; -
Time – doing this job could be a full time job, and buying & selling are slow processes.
Unknown hidden problems – it’s important to have an emergency fund for hidden problems.
Fees – plan for the estate agent fees, solicitor’s fees and auction fees.
Stamp Duty – There is a higher stamp duty levy for second homes.
Tax – Any money you make on the sale may be subject to Capital Gains Tax.
Buy-to-let - Advantages
Many people will want to buy a property and rent it out over the years. The benefits can be as follows;
Property Value – Historically, property prices have increased over time, especially if you also do improvement works to the property.
Tenants – If you look after your tenants, many will often turn into lifelong tenants, reducing the stress of an empty house, and meaning that they will often look after the house as if it was their own.
Rental Income – The rental income is often as much as, or potentially more, than any mortgage repayment value on a monthly basis, meaning that there may be little work for you to do to should you find tenants who will stay over the long term and look after your property.
Buy-to-let - Disadvantages
As with any investment, there are also risks involved and things you need to consider; -
Unoccupied periods – There may well be periods where your property is unoccupied. In those periods, you will remain liable for the mortgage and all bills associated with the property, and you can easily get into financial difficulty should this be the case.
Running Costs – You will need to factor in the associated costs that go with renting, including but not limited to; Annual Gas/Electric safety checks, buildings insurance, landlord liability insurance, property management fees if appropriate, remortgage costs, accountancy fees, wear and tear improvements.
Problem Tenants – Although unusual, some tenants have caused problems for buy to let property owners, either by not paying the bills, not paying rent, leaving properties a mess and/or in a position where future rentals would not be possible until repairs are completed. It is vitally important to check the credentials of your renters if you are doing this yourself, or understand your property management company rules and restrictions.
Property Slump – As in 2008 in the UK, there is always the risk that property prices in the UK fall, in any region. You need to be aware of other building projects in the vicinity, whether the area is up and coming or in decline, and any potential information which may cause a fall in your property price in the future.
Tax - The government are trying to reduce the number of second homes owned by people by increasing the tax payable at outset and reducing the tax benefits that used to be offsetable when owning a second property (allowable mortgage interest) over the next 4 years. It is vitally important that you look through all the figures with a financial adviser at Fernleigh Wearden & Co to ensure that this route is cost effective for you. We may refer you to an accountant if required.
Investments in property Property is one of the 4 main asset classes that a financial adviser will consider when investing lump sums or pension assets. This means that you may own some property funds, whether managed or directly, as part of any other assets you own.
If you wish to invest a lump sum directly into property funds, you can do this via a stocks and shares ISA or a pension, without the same level of involvement or risk in owning one property directly, as a fund will generally own a large amount of either residential or commercial properties, or invest in property companies.
FOR MORE INFORMATION: Contact Fernleigh Wearden & Co
T: 01772 864314
www.fernleighwearden.co.uk
www.facebook.com/fernleighwearden
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