We are currently living through troubling times, finding ways to make your hard-earned money go further is more important now than it has been in forever! Many Brits throughout the years have turned to property as a way to make their money work for them. Is investing in property still a viable option in 2021? Especially when the government is stacking the odds against the UK landlord?
How has investing in property changed since 2016?
Well, the landlords who have their properties in their own names are being crucified! A new tax law was put forward in 2015 called Section 24 and came into effect in 2016. In a nutshell, this law states that UK landlords cannot deduct their mortgage interest payments from their tax bill. This means that 100% of the property’s income is being treated as profit, as such the tax implications are monumental. You can now only claim 20% tax credit, based on the loan and mortgage interest.
Most landlords would have been using interest-only mortgages. In this example, a landlord pays £600 for their interest-only mortgages and takes in £1,200 a month in rent. In the past, £600 would have been deductible and is now classed as profit.
Even though the landlord is paying this expense every month, they cannot claim it as an expense.
If they have multiple properties mortgaged, this means their income would be higher and thus they would be in a higher tax bracket.
For some, their tax is higher than their income, which is unworkable!
This has resulted in several property investors selling a portion if not all of their portfolios. For some, it just isn’t worth the hassle anymore.
Are all property investors affected by this in the same way?
For some people, investing in property is their business, and have treated it as such. Rather than entering the landlord ‘game’ as a sole trader, they did it as a company, with limited liability. These investors have been unaffected by the change, as each year they pay corporation tax. As of April 2021, this is only 19%. A massive saving compared to the potential 40% discussed above.
These companies can still write off the mortgage interest from their profits at the end of the year. And now loads of fantastic properties have come on the market due to other landlords having to sell from their portfolio.
Is investing in property the best option?
This isn’t really a yes or no question, although it may seem as though it is. In reality, we need to observe a person’s willingness to take risks.
What do I mean by this?
The negatives
Not all tenants are saints… Some are downright nasty! Some won’t pay their rent on time; others won’t pay their rent at all!
You may well get phone calls at all hours of the day/night for the most trivial or foolish things!
Many people have had their properties wrecked by their tenants, ending up earning nothing at the end of the year due to the cost of repairs.
This isn’t designed to put you off, but to highlight the problems that may arise from letting out a property.
One of the other things to consider is the initial cost of the property as well. Depending on where you’re buying, this could be extortionate.
The positives
In some cases, investing in property can be very fulfilling, many people feel like it’s their opportunity to give back. Some landlords rent to people on low income and decrease rent prices as a result.
Property investing is a fantastic way to make money while you sleep. For some people, this is truly passive income! I mean, isn’t this what we’ve all dreamed about?
Capital appreciation – your property going up in value over time! They usually do, and boy is it good!
Many investors are just that, investors. They don’t want to be a landlord. So they hire a property manager they can trust, who will manage the property – find tenants when it’s empty; check up on the property periodically, get repairs done when something happens and ultimately make sure the tenants aren’t doing anything rotten! This could be a dream come true for some people.
The current interest offered by my Nationwide building society is around 0.5% at its maximum!
I mean that is ridiculous!
Investing in property yields much higher than that! Especially when you know what you’re doing. I have friends who have properties with a return on investment of around 35%! That’s just yummy! Especially when you’re all about saving money and building wealth.
Remember though, it’s all about your willingness and ability to deal with risk!
So, is it the best option?
Investing in property is a fantastic option!
I mean people are always going to need somewhere to live!
If your rents are competitive and the quality of your accommodation is reasonable, you should always manage rent out a room or a house!
It isn’t however, the only option you should have! Here at End-Rich, we’re about spreading out the risk! It’s not a great idea to put all your eggs in one basket.
In fact, it’s a dreadful idea!
You need to make sure your portfolio is diversified. This can be diversified in the types of properties you invest in.
For example – You could have some family lets, commercial property, HMOs, serviced accommodation.
It would also be a good idea to have multiple streams of income. This could be investing in stocks and shares.
My personal choice would be to invest in index funds as they’re diversified in themselves! Stocks and shares on average return around 8-10% a year. In many cases, this is more than property! Also, nothing is sweeter than compound interest!
“Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”
If you are unsure about whether or not you want to tie up so much of your money into a property, which is incredibly illiquid – you have to sell your property to get all your money back (which could take months and in some cases years). You may well want to invest in Real-estate Investment Trusts (REITs) – which are funds that allow you to invest in commercial properties that trade in the public market. Your money will generally be tied up for a certain number of years. However, this option can return up-to around 10% a year!
How do I start investing in property?
This isn’t easy! For many Millennials in the UK, this is downright hard! One of the first things you’ll need to do is save.
That’s right, I said it! You’ll need to put money aside each month and not touch it. You’re not even allowed to use this money to buy a coffee! To do this, you’ll want to track your finances and start a budget. Sign up to our mailing list today and get the Free End-Rich Finance tracker and a budgeting sheet!
Eventually, that money you put aside will grow and will be useful for a deposit. However, if you’re starting your property investing in London – you’re going to need to save for a lot longer!
For many, putting their savings into an investment ISA would allow them to invest that money and collect the compound interest. They would save for more than 5 years before drawing down on the cash to see some real growth! The best part is, you don’t pay any tax on this money!
If you already have a property, why not consider re-mortgaging and drawing down on that sweet, sweet equity!
Let’s say your property in London is worth £650k. You could re-mortgage, borrowing 50%. That would give you £325k to buy a property somewhere else in the UK, or even abroad! Then you convert that mortgage into a buy-to-let mortgage and use the income to pay down the mortgage each year! The left-over money could be put into stocks and shares to help you diversify, or you could borrow less initially and pay it off faster!
When paid off, you have two houses, one of which is bringing a decent income each month! Now you can work less!
There are other options, but this isn’t an exhaustive list.
Summary
Investing in property is a fantastic option and will likely always be. It’s a great place to store your money to see a return, it’s also a great place to see capital appreciation – making your initial investment grow exceptionally.
There are definitely some issues with investing in property – especially the risk factor. Make sure you understand the risks and maybe join some landlord groups on Facebook to gain some understanding.
Remember not to put all your eggs in one basket. Although investing in property is a fantastic option, it isn’t the only one. Make sure to spread your money out to see it grow with less risk attached.
