Are you thinking about investing in buy to let property as a retirement plan (or part of it)?
Over the last few years, many people have invested in property as they believe that it will provide a better return than a conventional pension plan. This has turned out well up to now, but is investing in a rental property still a good idea for retirement?
As you can imagine, there are many things to take into consideration when answering this question. I am an experienced real estate investor and through it, I have achieved the freedom that I wanted. So I will always advocate it as a smart thing to do.
Nevertheless, in this post I will point out to you the pros and cons on investing in buy to let property as part of, or your complete, pension plan. Property investment is not easy and not for everyone, so I want you to be aware of what is involved and what you are letting yourself in for.
At the end of the day, it is very satisfying to have at least one rental property that generates income for you every month. But you need to decide whether it is for you are not. As a landlord, you will have responsibilities for your tenant(s) and this can take up quite a bit of time.
How much do you have to Invest?
The first thing that I suggest you do is to work out how much you can afford to invest in a rental property. Average house prices in the UK are slightly over £250,000 at the time of writing this post. Do you have the funds to purchase a buy to let property outright? Don’t forget to include any renovation costs in your calculations.
You may have this kind of money in your current pension plan. If you do, how comfortable will you feel about using all (or most of it) to invest in a property? The alternative to this is to use some of the funds as a down payment and then get a mortgage for the rest.
Is it possible for you to obtain a Buy to Let Mortgage?
Let’s assume that you can put down a reasonably large down payment or deposit on a buy to let property. Mortgage lenders will certainly appreciate that and will probably reward you with a loan that has a low interest rate. That is if they will lend you the money in the first place.
Some lenders have age restrictions for buy to let mortgages (and mortgages in general). So depending on your age, it may not be possible for you to obtain a mortgage. Some lenders have now raised the age limits on mortgages to 85 years old, so you should be OK with the right help. I recommend using a good mortgage broker to find the right deal for you.
You may be still working now and earning a good income that will cover the mortgage repayments, but once you retire, will you still be able to manage this comfortably? Do your homework here and crunch some numbers. Find out what the repayments would be on a buy to let mortgage to cover what remains after your deposit.
In theory, the rent that you receive from your tenant(s) will more than cover the mortgage repayments (otherwise it is not worth doing it in the first place!). However, mortgage lenders will want to know that you can cover the repayments without any rental income. There could be times when you do not have a paying tenant.
A mortgage lender will also want to know if you have any additional sources of income. Maybe you have annuities or other investments that could cover any shortfalls? You will have your own living expenses which the mortgage lender will want to know about, so it is not just about covering the mortgage repayments.
Lenders always look at the worst-case scenario – they need to do this to protect their business. If you are unable to find tenants for your buy to let property for some time, then your investment property is just another expense for you.
So I would recommend that you do look to borrowing some of the money rather than using all of your pension fund to purchase it outright. Properties can be expensive even without mortgage payments, so it is wise to have something in reserve.
Do you have the Risk Appetite?
Property investment is a risk. Investing in a buy to let property in the right location should be a lower risk, but it is still a risk. You know that your pension fund will probably not provide the same level of return as investing in property, but it is pretty risk free for you.
There are a number of things that you can do to mitigate the risk of investing in a buy to let property. You must do your homework before you consider any properties. What is the average rental yield in the area that you want to invest? Do other areas have better yields?
These days, buy to let investors are prepared to go further afield with their investments to get the yields that they desire. Are you prepared to do this? Start by working out what monthly income you desire from your rental property. Then you can choose an area where this could be a reality for you.
Knowing your numbers is crucial. You are going to use the income (after tax) from your rental property to supplement your pension so you need to factor in all of the likely costs. If you have a mortgage to pay then this is one cost, what about maintaining the property?
I always recommend that landlords put money into a savings account each year to cover those things that are hard to predict. If you don’t use the money then you still have it earning a bit of interest. You just never know what is around the corner when you are a landlord.
You can use a letting agent to find tenants for you and manage them. This is going to cost you money of course, but they know what they are doing and can take the pressure off. Having a rental property that is empty for months is not good.
Letting agents can also take care of any maintenance issues as well for you. You need to decide if you want to do this yourself or not. Remember that tenants can call their landlords at any time of the day or night – is that something you can handle?
The bottom line here is that if your risk tolerance is really low then property investment may not be for you. It is hard work getting your property ready for rental and there is the risk that you may not find paying tenants for a while. Tenants can also do crazy things like stop paying their rent.
House prices can go up or down and now with the Covid-19 pandemic the pessimists believe that they are due for a tumble. If this does happen then you will be able to purchase a property for less, which is a good thing.
One good thing about the private rental sector is that rental prices are rarely affected by the economy (or pandemics). If you have a property in an area that is in great demand then you should be able to charge the going rate.
Is it worth Investing in a Rental Property for your Pension?
It will always be likely that the returns on property will outperform those of a pension plan. Nevertheless, you need to take taxation on your income into account as well as things like stamp duty. I recommend that you use a good tax advisor here.
One good thing about property is that most people understand it. They know that property prices increase usually and that rental prices are usually stable. The demand for private rental property continues to rise, as there are not enough homes available for people to live in.
With a pension plan, you have a tax efficient way of saving for your golden years. The government provides a degree of tax relief on pensions. You can go for a Lifetime ISA for example where you can invest a maximum of £4,000 per annum and you will receive a 25% bonus from the government.
However, a pension plan will usually not provide enough income for a comfortable life. Investing in a rental property should certainly provide a larger income. In addition, you always have the option of selling the property, which should provide a decent sum after paying capital gains tax.