For lots of investors, there is the age-old dilemma of whether to invest in a pension or in property. Here we look at the pros and cons of buying an investment property.
Over the years, it’s been obvious why investing in property has been popular with so many people with rising house prices boosting their capital investment and the rent from a buy to let property delivering a steadily increasing income.
Along with strong demand for rental homes, a buy to let investment offers an investor something that’s not just familiar but is also easy to understand since they will have seen the value of their own property increase over the years.
Also, pension freedoms have enabled retirees and potential retirees the option of using their pension pot to invest in a buy to let property.
However, there are pros and cons to take into account before investing in a buy to let property and this will highlight whether it’s the most profitable way of using your cash.
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Here are the main pros and cons of buying a rental property.
Pros for a buy to let investment
The pros for a buy to let investment include the long-term
growth of house prices, though they do fluctuate and have slowed in recent
years. Property is still, for many people, a relatively
safe long-term investment. Also:
- Your rental property will generate an income to
help meet mortgage payments
- Buy to let mortgage rates are very low to enter
- Landlord costs can be offset against tax.
However, we should really take a closer look at the last pro since the rental income is subject to income tax.
To help, you can claim the fees that are paid to a letting agent, along with interest on the mortgage and any costs incurred while advertising your property and also paying for any repairs.
The rules changed on the wear and tear allowance though landlords can still get tax relief to cover the renovation of carpets, furnishings and sofas and also for maintenance and repairs. You cannot claim for improvements such as adding an extension.
Cons of investing in a buy to let property
The cons of investing in a buy to let property will need
serious consideration since these may undermine any profitability that will make
a buy to let investment a realistic proposition.
- Your property will be empty at some point and
earning no rent
- When it’s empty you will have to pay the
mortgage from your own pocket
- When buying you have to pay an additional 3% in stamp
duty (if you own a property already)
- You will need to maintain the property
- You will need to find tenants.
As you can see, the list of cons is longer than the pros and one of the issues that many potential landlords may not consider is that they will need to respond to tenant problems and complaints promptly.
This means being on hand 24/7 to deal with, for example, the
washing machine or boiler breaking down because this is your responsibility and
they can be expensive items to replace or repair.
Alternatively, you could pay a letting agent to deal with these issues on your behalf, but this then reduces the profitability of the investment.
If you have carefully considered the pros and cons, you may
have specific questions that you need answering, and here will try to deal with
some of them.
Is it better to rent and buy an investment property?
Since the interest rates on buy to let mortgages are so low,
you may be tempted to invest in a rental property, even though you may be
This tactic may be worth considering if you have a hefty
deposit and you want the flexibility that comes with renting, for example, you
may not be living and working in the same town or city where your investment
Also, when applying for a buy to let mortgage, the lender will need to see an income that will more than cover the mortgage, other than rental income.
Some lenders may also refuse to lend to a borrower who doesn’t already own their home.
Ultimately, you have to work out what your outgoings are,
including your rent and mortgage (plus the tax bill), and whether it’s worth
the time and hassle for the rent you earn. If you are looking to develop a
portfolio then this may be the best way of doing it effectively.
Can you live in an investment property?
One of the temptations for an investor is that buy to let mortgages
have lower rates of interest and may be easier to acquire them a personal
mortgage on a residential home.
If you’re wondering whether you can live in an investment property, then the answer is no.
Partly this is down to Financial Conduct Authority (FCA) regulations over landlord and residential mortgages.
It needs to be appreciated that usually a buy to let
mortgage will not come under FCA regulations, so a commercial investor has more
flexibility than those who obtain a residential mortgage.
You will find that a buy to let mortgage contract will
clearly stipulate that the customer will not be allowed under any circumstances
to live in the property – even for just one night since the mortgage will need
to be regulated and will not be a commercial proposition.
Also, your mortgage will be invalidated if you don’t reveal that you are living in the property, so you’ll have to repay the loan in full immediately.
However, it is possible to access a buy to let regulated
mortgage, which will allow yourself or a family member to meet FCA guidelines if
you occupy 40% or more of a mortgaged property.
Is it better to buy an investment property before a home?
As a first-time buyer, there may be an attractive
proposition if you’re looking to buy an investment property before you buy a
There’s no doubt that buy to let offers an alternative route to property ownership, but whether it’s right for all first-time buyers who may be struggling to buy where they live is a moot point.
While you may have saved up a big deposit, you may still not
be able to afford to buy a property in your area so you could consider
investing somewhere else in the country and continue renting.
On the surface, investing elsewhere looks to be a good idea
since the asset may well deliver a financial return over the long-term or
potentially act as a home for your retirement.
As mentioned earlier, there will be responsibilities as a landlord and you will be responsible for all maintenance bills.
Also, while you may have a large deposit, you may find that some lenders will not offer any of their products to first-time buyers at all.
In addition, you will need to prove to a lender that the
rental income will cover 145% of the mortgage payment before they will consider
offering a loan.
Sourcing a buy to let mortgages as a first-time buyer is more difficult, but it’s not impossible, and you should realistically have a deposit of at least 25% of the buy to let property’s value.
What are the advantages of having an investment property?
The advantages of having an investment property are
potentially lucrative – especially if you retain the property for the long-term
to enjoy cumulative house price rises. The advantages also include having a monthly
income for paying the mortgage and any maintenance bills.
However, you’ll need to buy the right type of property that tenants are looking for, and it must be in an area where tenants want to live – this is not necessarily what a property investor will be considering.
Though with house prices predicted to continue rising, thanks to strong demand from tenants and first-time buyers, the capital investment could be among the best performing of all investment assets.
Can I buy an investment property without owning a home?
If you have a large enough deposit, a high enough income and
can meet the lending criteria for a lender, then yes, you can buy an investment
property without owning a home.
Whether you have been a long-term tenant or are an expat, then a buy to let investment property may be an ideal vehicle for your money.
However, the range of financial products available may be
limited since many lenders would prefer a borrower to own their home, usually for
at least six months before they will offer a buy to let mortgage.
The pros and cons of any financial investment
Essentially, you should research carefully the pros and cons
of any financial investment as to whether that particular investment is right
for you and this also extends to property investment. You should also consider:
- While property prices have performed strongly in
recent years, that’s no prediction that they will do so in future
- You will need to find quality tenants who will look
after your property and pay rent on time – that’s easier said than done
- You should appreciate that running a buy to let
investment will be take up more time than you expect
- Be aware that the tax changes introduced by the
government in recent years have had a dampening effect on the enthusiasm of
investors since it’s not as lucrative as it once was.
Indeed, to underline the last point, growing numbers of landlords with just one rental property are deciding to leave the market.
For those who are considering the pros and cons of property investment, and if you are looking for a long-term investment opportunity that should perform strongly, then you need to research carefully.
We have a number of articles and guides related to property investing, though we also strongly advise you seek professional advice before risking any of your own money.