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Buy To Let in retirement – does it stack up?

Financial writer Kara Gammell looks at the growing trend of retiree Buy To Let landlords and asks whether it’s still an attractive option. 

With changes to tax and stamp duty, does being a retiree landlord make sense?Bricks and mortar has long been viewed as an investment safe haven, with a growing number of retirement savers being landlords – either by choice or accident.

New figures from retirement specialists Responsible Life, show that nearly three quarters of pensioner landlords said they would struggle to make ends meet if they didn’t have the income from their buy-to-let property. 

The poll found that eight out of ten pensioners who own a buy-to-let said their properties provide an important, even vital, boost to their retirement income, especially with low interest rates hammering retirees’ savings. 

No relief in sight 

Nearly all of those interviewed said they were worried about the changes to mortgage interest tax relief that will impact on the profit they make from their investment property.

What’s more, while higher-rate tax relief on mortgage interest will reduce from April 2017 to the basic 20% rate and the abolition of the wear and tear allowance will add to the financial misery.

Some of the increased costs can be passed onto tenants, but passing on costs is not a viable way to recoup them all. 

As a result, many pensioner landlords are considering whether it’s worth holding onto their buy-to-lets at all. 

According to the research by Responsible Life, four out of ten pensioner landlords said although their buy-to-let property was a valuable income generator, they are now thinking seriously about selling it.

"For many pensioners, having a buy-to-let property has been a life saver in this low interest environment,” says Responsible Life managing director, Steve Wilkie. “While their savings have languished, earning very little interest, and investments have been hit hard by falling share prices, property income has remained strong.”

Stamp it out 

The recent and proposed changes make buy-to-let a more challenging investment, says Jonathan Harris, director of mortgage broker Anderson Harris. 

From April 2016, anyone with two or more properties has to pay an additional 3% stamp duty surcharge on properties worth more than £40,000. This will push up the cost of stamp duty on a ££200,000 buy to let property from £1,500 to £7,500 – a whopping £6,000 increase. 

“Compared with some of the alternatives, such as poor savings rates and volatile equities, property is still likely to appeal to those planning their retirement,” Jonathan says. “It might not be quite as attractive as before but in the long term, which any retirement planning should be, capital growth will still have some appeal.”

However, a recent report from the Intermediary Mortgage Lenders Association claims that the fears about the impact of the stamp duty hike for buy-to-let landlords are being overblown. 

It pointed out that once the 3% stamp duty is taken into account and averaged over the 20 year life of a typical buy-to-let investment, it costs just 0.15% annually – the equivalent of 15p per £100.

But is now the time to sell up? Or should those looking for a pension in their property hold tight and ride it out?

‘We are not seeing a wholesale exit from the buy-to-let sector,” says Harris. “Undoubtedly some pensioners will sell up but more likely they simply won’t add to their portfolios, but stick with what they have.

“Compared with other investments, buy-to-let still has some advantages and those who have been invested for a while may have some equity in their properties so will still be able to manage once the tax breaks become less attractive.

The truth about becoming a landlord

It is easy to see the appeal of property as an investment. But is it a sure thing?

Buy-to-let investment is very different from owning your own home. When you become a landlord, you’re effectively running a small business – one with important legal responsibilities.  

You need to take into account the amount of money that needs to be spent on maintaining the property, probably using an agent to complete all of the checks required to ensure you get the right tenants, and the general management of the flat or house.

“You can easily kiss goodbye to around 10-15% of your monthly rental income in agency fees, if not more, for instance,” says Alison Steed from money hints and tips site MyMoneyDiva.com. “Added to that, you need to think of the maintenance of the property and garden, getting Energy Efficiency Certificates, gas safety certificates to confirm boilers are safe, and so on. 

“In the end, you may find that you are spending more than you think on the day-to-day running of a second property, and this should not be underestimated, especially when you are searching for income.”

What’s more, would-be landlords have to bear in mind that there may also have periods where there are no tenants in the property which would remove your income source. If you had to evict a tenant, there is also the cost and stress that comes with it. 

The other difficulty is that if you find yourself in a position where you need to release the capital tied up in the property, there is no guarantee that it will sell quickly, and there are also the estate agent’s, legal and other fees from a house sale to take into account. It may take some months which could leave a pensioner in an awkward position.

If you’re thinking about converting a second property into a rental or investing in a buy to let, then you should bear in mind how the market is changing. The combination of changes to tax relief, increasing stamp duty costs, being a landlord and the fact that it can be hard to sell a property in a hurry if you need the cash, mean any decision should be carefully considered.

This article has been commissioned by retiresavvy and any opinions voiced are the author's own.

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