As a financial adviser, I am frequently asked about the merits or otherwise of investing in buy-to-let properties.
Many GPs have additional disposable income and look at various options to boost their future retirement income.
If you already have good pension arrangements, a buy-to-let property can be an excellent way of boosting your retirement funds.
When you retire, you can keep the property and add the rental income to your pension and other income. Or you can sell it and use the proceeds, less any mortgage debt, to supplement your income.
While the buy-to-let market has been extremely buoyant during the past decade, it is important for buyers to regard this type of property as a long-term investment.
Historically, the property market has had its ups and downs in terms of investment return, but has shown positive growth in the past 10 years.
Buy-to-let mortgage interest and related expenses can be claimed against tax, which means that most investors tend to fund their buy-to-let purchase via a mortgage.
If a GP has, for example, £200,000 to invest, this could provide the wherewithal to buy three properties with mortgage funding and put down a deposit of £50,000 on each, while retaining £50,000 as an emergency fund.
Buyers tend to go for interest-only mortgages and might not repay any of the capital borrowed until the mortgage ends. I think that it is better to repay some capital during the mortgage term, to cut down the interest charges.
If (as it should) the rent that the property generates exceeds the mortgage payments, I advise paying all of it to the lender because this will increase the capital gain you make on the property. Note, though, that you might incur a capital gains tax liability when you sell.
Most buy-to-let lenders will require a minimum deposit of 15-20 per cent of the purchase price to lessen the chance, if property values were to dip, of investors being in negative equity. A buy-to-let property should, in effect, be 'self funding' and have no impact on how much you can borrow on your own home. However, some lenders will not ignore debt on a buy-to-let when considering loan applications and might repossess if you do not keep up the mortgage payments.
Given the surge in house prices and other factors, such as high divorce rates and large numbers of students not living at home, rental properties are in demand. Properties bought with younger professionals or small families in mind are usually in higher demand than five-bedroom houses.
- Liz Willis is from the Medical Profession Advisory Division, St James's Place Partnership, 07900 654401, firstname.lastname@example.org
TOP 10 TIPS FOR INVESTING IN A BUY-TO-LET PROPERTY
1. Be businesslike: a buy-to-let property is an investment and you are not going to live in it.
2. Location is crucial. The property should ideally be situated near a university, city centre, or major employer. Two-bedroom flats and terraced houses might be more in demand than a large detached house with a high-maintenance garden.
3. Some investors specialise in student accommodation, but there can be pitfalls. Such properties are often let furnished on the basis of one room per student. If you let out six rooms, you have to ensure each room has its own fire exit.
4. It is best to buy a property that will produce the maximum rent in relation to the purchase price. For example, if two properties will generate £700 and one costs £150,000 and the other £180,000, buy the cheaper.
5. Seek out expert advice when looking for a buy-to-let mortgage. Some lenders offer much lower interest and other charges than others. You can choose between variable interest rate, discounted, fixed rate, trackers and flexible loans.
6. To satisfy lenders, the monthly rent generally needs to be 125-130 per cent of the mortgage payments.
7. Consider hidden costs, such as stamp duty, and expenses such as repairs, boiler servicing and buildings insurance. Older properties can have much higher maintenance costs.
8. With student accommodation, it is advisable to furnish the property and update the furnishings every two years.
9. You can manage tenants yourself or, for a percentage of your rental income, employ a lettings agency. Some agencies offer insurance to provide you with rental income if the property is vacant for a few months. If managing the property yourself, make sure you draw up a good short-term tenancy contract so that you can evict tenants who default on the rent.
10. You can also let the property through a local housing association (if it is in need of rental properties). Your rental income will be slightly lower than the market value rent, but you will always receive the rent (whether the property is occupied or not) and the agency arranges all maintenance and repairs.