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Your Pension Fund Doesn’t Care If Your Boiler Breaks Down (& Other Reasons Why Buy To Let Investing Isn’t The Panacea)

If I had a £1 for every time someone said to me they are interested in buy to let investing I would be on a beach somewhere right now (or maybe £100 but you get the point).

“Property is the only reliable investment and  you can get great income from it” is the way it usually goes. Not necessarily and sometimes is the short reply.

Yes, property has been a great investment for many; property valuations in the UK have grown considerably over time and current income yields are attractive compared to other assets (dividend yields and saving rates particularly) but they are not the panacea that many people like to believe they are:

  • If you manage the property (property portfolio) yourself you have to deal with breakdowns and refurbishments, sometimes in the middle of the night and sometimes as a false alarm (confession time: I once had a landlord come over to fix the boiler only to be told a cookery book was leaning against the switch and turned it off. Ooops!)
  • If you don’t want to manage the property you have to pay fees to get an agent to do it for you (and so give up some of the attractive yield).
  • Property valuations do fall in value; according to Nationwide UK house prices fell by 7% in 2008 and 2009 and didn’t fully recover until 2014. The risk/reward relationship is lower than shares so the downside is not as great but then neither is the long term upside, particularly when you factor in re-investing income.
  • If you don’t have a tenant for any period of time that is lost income, which may be needed to meet mortgage commitments.
  • The transaction costs are much higher compared to other investment options. Stamp duty alone is between 3% and 15% of the purchase price. Compare this to the tax relief given to pension investors and the swing could be as much as 60% for additional rate tax payers. This is before surveyors and lawyers have taken their fees.
  • Unlike ISAs and pensions capital gains are taxed at either 18% or 28% (second properties didn’t benefit from the recent CGT reduction) and income is taxed at marginal rates whereas ISA income is always tax free.  Pension income is taxed once in payment but it is possible to vary the income received to reduce tax.
  • Property is an illiquid asset, you can’t sell a brick if you need money and it may take many months before an offer is accepted and the drawn out sales process is complete.
  • You don’t have the benefit of diversification you do with other investment types meaning your are reliant on economic conditions in one town, region or even country.
  • You’re part of the problem not the solution: the nation’s obsession with property is pricing out first time buyers and lower income earners, breaking up rural communities for holiday lets and building on green belt land to meet the growing demand.

It’s not that I’m again property; I’ve been a beneficiary of strong growth myself and it can be a useful asset to provide long term  income but I believe too many people are blinkered into believing it is the only appropriate asset to hold when other alternatives may be more favourable.

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