Call that a buy to let property investment?

Property investment is about the numbers not the neighbours…

It’s not surprising that many ordinary people are being drawn into buy to let property investment; after all, the historic gains have been widely publicised, and wealth generated through property dominates every ‘rich list’ ever compiled.

Owning and developing property is pretty much like growing a money tree; look after it and it will keep growing; growing money.  If you don’t sell today; it’s worth a bit more tomorrow.  But you can’t be too complacent, mistakes are made and no one likes working for nothing, or worse, having to take a loss.  So understanding the numbers is critical to successful buy to let property investment.

Avoid taxing numbers

The buy to let mortgage was introduced in the UK as recently as 1996 and has only became commonplace in the line-up of financial products offered by banks and building societies over the last 5 years. 

The buy to let mortgage is a wonderful thing, it allows you to borrow a vast sum of money against property (not your earnings), and what’s more, the taxman lets you write off the costs against rental income. Fantastic; free capital growth on an asset paid for by borrowed money - try doing that in the stock market! 

Capital Gains Tax (CGT) is another big number for property investors.  From 6th April 2008 tax on sale of a buy to let property investment goes down from 40% to 18%, result.  This coupled with the annual CGT allowance (£9,200) means you should pay very little or no tax on your property investment profits. 

Pensions have also been turned up-side-down; the promise of owning residential property in a tax-free pension was pulled before the pension reforms introduced 6th April 2006 (‘A’ day).   However, the rules have changed and there are plenty of property investments that can be held in your pension to benefit from a very favourable tax free environment.  Pensionable property investments here can provide exceptional returns with very little effort or risk once you have negotiated the new rules and jumped through a couple of burning hoops.

Minimise random numbers

When buying and owning property as an investment, don’t accept random numbers. 

How much does it cost?  With investment property ranging from £67 per sq ft to over £2,000 per sq ft it’s not surprising that property pricing seems pretty random.  In the past 5 years I’ve seen developers sell so far below market that investors have made over £100,000 on 1 apartment; equally it is an industry where the opposite is more common. 

The Bank of England conducted some research entitled ‘Asset Pricing and the Housing Market’; the premise is very simple:  Return less associated costs / property value = % yield. In today’s market you should be looking for a yield of 6% to cover finance and running costs.  This is the first number in any property investment, and provided the income numbers are genuine and there is a strong demand for rental property in the area, it shows property is not overvalued and has the makings of a good investment.

Developers’ profit is not a random number.  In the UK, property companies work on a profit margin around 20%, developers working largely in the investment sector sell their developments off plan and often work on a margin closer to 15% enabling them to sell their developments early and minimise the risk and cost of holding stock.  This is a great number to focus on when selecting your property investments, but be careful, you don’t want inefficient developers whose costs are out of control making their developments unnecessarily expensive.  Beware the flashy marketing suite selling off plan investments.

Buying off plan offers the potential for capital growth on the gross value of a property with a modest investment, usually 5-10% of the property value.  The opportunities to earn large profits buying ‘off plan’ are well documented, the watchword is buy right and avoid spurious charges and fees. 

Avoid the random number generators

Brilliant investment properties can be turned into a painful and expensive exercise when too much of your cash goes into the purchase of your investment.

Having personally watched a stock broker randomly buy and sell shares with my money and rack up costs (fees for him) of around 2% of my portfolio, there was no comparison to the tracker I bought that charged an annual fee of just 0.25% (or some 87.5% cheaper).  At first I believed my stock broker would deliver the value, the reality was he actually underperformed against the tracker and was fired.

As with any young market, property investment has a healthy share of opportunists looking to take advantage of new investors learning the ropes.  Don’t pay excessive fees in the belief you will get a better investment, the reverse is usually true.

Random numbers to avoid: finders fees, fees secretly added to property prices, spurious discounts, legal fees, unrealistic rental assessments, stamp duty (where possible), ridiculous fees for mortgage arrangements.

Keep a grip on the daily numbers 

Chances are your careers officer didn’t suggest ‘property investor’ as the ideal career for you.  If they did you would have probably been schooled in the disciplines of finance, accountancy, law, taxation, insurance, conveyancing, marketing, building regulations, interior design….…and that’s just year 1.

There are many numbers to learn, manage and control; keep a tight grip of these and buy to let property investment remains one of the strongest, most tax efficient investments you can make, but remember high returns are the target:

Many happy returns.

David Walters

Property Investor and creator of offplan-investor.com

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