Should you put your pension into property ?Analysis, Background, Buy To Let, Investment
Now tax and pension rules allow some of those holding private pensions to drawdown some of the money from their pension pot, some people might be considering putting their pension money into property. Here are some things to bear in mind if you, or a friend or relative, might be thinking about investing pension money into property:
* First and foremost bear in mind that property is normally considered to be a long term investment – over 10 years, or even over 20 years. What do you expect to be doing in 10 or 20 years, and how will owning an investment property fit in with your plans then?
* What’s your motivation for putting your money into property? Traditionally property investors invest for capital growth or income. In recent years, investors have benefitted from both but that shouldn’t be taken as a given.
If you’re investing for capital growth what sort of timescale are you hoping/needing to make a gain over? If you’re still working do you really want/need the extra income? (It might even increase your tax bill.)
* Consider the leverage question. Seasoned property investors generate much of their wealth in property by investing with a small deposit and taking a mortgage for the balance, hence benefitting from the power of leverage. If you buy outright with cash you won’t benefit from this leverage. Would you really want to take a mortgage? Would you be able to secure one?
* Is property really such a good investment? In recent years high and rising property prices, high deposits and more restricted access to mortgages have fuelled high demand for rental property. Pretty much any property has rented out easily at a good return. That might not necessarily be the case in future – say in 5, 10 or 20 years.
* Other recent tax changes restrict wear and tear allowances, increase stamp duty for investors and restrict mortgage interest tax relief. Property can still stack up as a good investment but you’ll need to factor this into your figures. (If you’re not buying with a mortgage this could give you an advantage over other buy to let investors.)
* Could it be a problem you could do without? Apart from the work involved, in the past the property letting sector has been relatively lightly regulated by law. At the moment, however, regulations and costs of being a landlord seem to be increasing.
If you decide that bricks and money could be the right home for your pension funds here’s some advice on getting started:
* Consult a financial adviser, before you do a thing. If you’re fortunate enough to have a large enough pot to invest in property you need to investigate the tax implications not only of drawing it down but of putting it into property, receiving an income from that property, and ultimately selling that property. Don’t put your money and effort into property only to see it taken in tax.
* Think about what scale of involvement you want. There’s a big difference between buying a single buy to let (although that still involves work that shouldn’t be underestimated) and running a portfolio of several properties, getting involved with renovation and so on. How much time and money are you able and willing to commit?
* If you’re interested in buy to let study the market carefully. Think about what you want to buy, where, who will want to rent it and what kind of rental figure they’ll be willing to pay. Some areas/kinds of property/rental markets make much better propositions than others.
Although many new investors think of renting to professionals or families it is usually the case that shared property, student property or property let to housing benefit tenants offers better yields (although there are drawbacks to these kinds of lets too).
Here’s a useful article about buying buy to let apartments.
Here’s an article about some of the common buy to let errors to avoid.
* Live, breathe and eat yields! Get to know how yields work (yield is basically annual rent decided by the price of the property you buy x 100) and calculate the yield for every property you might be considering buying. With low savings and annuity rates property yields compare very favourably right now, but that might not always be the case. (It’s easy to forget that in 1989 base rate was 15%!)
* Buy as cheaply as possible, preferably under market value. This is where seasoned property investors make much of their money in property, rather than purely from rental income or capital gain.
Tip. Seasoned property investors rarely buy property through estate agents at ‘retail’ prices. Consider alternative approaches like property auctions. Here’s a useful article on property auctions which you will find helpful: Can you bag a bargain at auction?
* Have an exit strategy. With property, like every kind of investment, should have an exit strategy in mind from the beginning – here’s a useful article on the subject: Buy to let investment: what’s your exit strategy?