Mark Dampier: Buy-to-let may be no shelter for your cash
Friday 23 August 2013
The British love of housing is legendary; the stuff of dinner parties and potential general election defeats. Over the past 20 years a new breed of investor has emerged: the buy-to-letter. Generally they have done well in a period of falling interest rates. Not only have they achieved a good yield but a fair measure of capital appreciation too.
Much has been written on the UK housing market over the past week. I wonder for how much longer the impressive returns on buy-to-let investments can continue. More concerning are the poor comparisons I see between buy-to-let and cash deposits.
The dramatic fall in interest rates over the past few years has left many people scrabbling around for better investment returns. Buy-to-let increased by 19 per cent in volume and 31 per cent in value last year, according to the Council for Mortgage Lenders.
This coincides with deposit rates falling to around 1.5 per cent. News media in particular give headline yields on buy-to-let of 5 per cent to 6 per cent. In an extremely superficial comparison the yield of course is far superior to cash deposit. Yet interestingly in a time when the rest of the financial services industry is rightly being asked to be more transparent on fees, the unregulated buy-to-let industry, along with many television programmes devoted to property, has little to say on costs or fees.
I am not anti buy-to-let, but it is a little more complicated than buying the house next door. The professional or more savvy buy-to-let investors tend to seek out properties under the stamp duty threshold in unpopular areas with yields of 8 per cent plus. My worry is a new brand of investor is emerging who believes buy-to-let is a safer alternative home for their capital than the bank or building society. In this case, is a yield of 5 per cent to 6 per cent enough and is this the yield you actually receive?
I would argue it isn't and I also think buy-to-let investors have to accept they are unlikely to receive any yield for the first year at least. The costs of buying the property must be considered, particularly if the purchase price is above the stamp duty threshold. Add solicitor costs, service fees if it is a leasehold property, and management costs and most of the first year's yield will probably disappear.
Other costs must also be considered. The property might need furnishing and landlord's insurance would also be prudent. There are also maintenance and repairs to consider. At the very least these can be time consuming and a hassle. The alternative is to pay a company to manage the property on your behalf, thus incurring further costs. Buy-to-let properties are also prone to periods of vacancy when there will be no rent coming in. These other costs could easily cut the headline 5 per cent to 6 per cent yield in half. Finally, it must be remembered that secondary property can be illiquid – it could be difficult to sell quickly if you require your capital back.
Many buy-to-let investors are also failing to consider the impact of rising interest rates, in my view. At some stage interest rates will have to rise again. The summer of 2015 is being predicted as the most likely time; convenient for the coalition government given that it would be after an election. Should cash deposit rates rise to say 4 per cent or 5 per cent, buy-to-let investments will start to look less attractive in comparison. Some might point to capital appreciation as being able to compensate, but once you delve below the headlines it becomes clear that outside London there has been virtually no recovery in property prices.
I am a natural cynic of politicians who are famous for their policies designed to please the electorate in the run-up to a general election. The funding programmes the government has designed are more useful to help that feelgood factor. There will be a price to pay, in my view, but this won't come until after the election. Unless you are a professional buy-to-let investor be careful. Buying the flat or house next door is not true buy-to-let. Do your sums carefully and I think you will find you want a yield well north of 5.5 per cent to make it really worthwhile.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit hl.co.uk/independent
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
- 1 Snoop Dogg and Jared Leto buy a stake in Reddit as A-list invests $50m
- 2 Prince held a Facebook Q&A and this is the only question he answered
- 3 Car tax disc changes: Two days to go - and they affect you much more than just not displaying a piece of paper
- 4 Now we know whose fault it is if you end up being murdered in Thailand
- 5 35,000 walrus gather ashore on north-west Alaska beach 'for a rest'
Exclusive: 'Putin's Russia has been my biggest regret,' says Nato's outgoing Secretary General
The Osborne Ultimatum: Chancellor’s benefits freeze bombshell will affect ten million households
There’s no excuse for Dave Lee Travis’s behaviour, but we need to keep a sense of proportion
Should gay sex be illegal? 16% of Britons think so
Mark Reckless becomes second Tory MP to defect to Ukip in a month
Benefits 'smart cards' plan revealed by Iain Duncan Smith to stop claimants spending welfare money on alcohol
- < Previous
- Next >
iJobs Money & Business
£18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...
NEGOTIABLE: Austen Lloyd: TRUST ACCOUNTANT - KENTIf you are a Chartered Accou...
£18000 - £20000 per annum + OTE £30000: SThree: SThree are a global FTSE 250 b...
Highly Competitive Salary: Austen Lloyd: CITY - Law Costs Draftsperson - NICHE...
Day In a Page
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors