Could buy-to-let fund your retirement?
BY Harvey Jones
1st Jan 2015 Pensions & Retirement
Buy-to-let has been one of the most successful investments of the last 20 years, and now it looks set to enjoy another burst of popularity, but is it a good idea for retirement?
One in three people heading for retirement are now considering purchasing a buy-to-let property, according to a recent survey by Platinum Property Partners.
This follows new pension freedoms to be introduced in April, which allow the over-55s to take their lifetime savings as cash, rather than having to buy an annuity when they retire.
Tens of thousands of older people are expected to take the money and inject it into the property market, in a bid to get a better return.
Given the dismal interest rates paid on cash, it certainly makes sense to look around for something more lucrative.
Buy-to-let involves taking out a mortgage to purchase a property, then using the rental income to service your loan.
It is particularly tempting for retired people, because any surplus income can be used to bolster their pension.
With mortgage rates at an all-time low but the average UK rent a hefty £767 a month, the sums look highly favourable.
Buy-to-let investors made an average return of 13.3% over the past year from a combination of rental income and house price growth, according to recent research from estate agency chain Your Move.
It expects this success to continue, calculating that the average buy-to-let investor in England and Wales can expect a total annual return of more than 11% in 2015, equivalent to £20,520 per property.
Just don’t underestimate the effort involved in setting yourself up as an amateur landlord, and the potential risks if, say, interest rates rise or house prices crash.
To get into buy-to-let, you need a little cash behind you, as you typically need to slap down a 25% deposit to secure a competitive mortgage.
Although you can get two-year fixed rates from less than 2.50%, many carry arrangement fees of between £1,000 and £2,000.
You also have to do careful research to find the right property in the right area, with plenty of tenant demand.
Then do up the property up to a rentable standard, find and vet tenants, comply with legal requirements, and manage and maintain the property.
It would make life easier to ask a letting agent to manage your property, but bear in mind their charges will eat into your returns.
You also have to make sure you can afford to service your mortgage during ‘void’ periods, when your property stands empty between tenants.
Be wary: there is always the danger that pension freedoms are fuelling a buy-to-let bubble, which may ultimately burst.
If you're investing for the long-term, rather than trying to make a fast buck, you should be able to overcome most of these problems.
But remember that while buy-to-let has earned good money, it certainly isn’t easy money.
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