Interest rates are a funny old thing and those who project them are even funnier! Let me explain what I mean.
Towards the latter end of 2014, the Bank of England indicated that interest rates would rise from the middle towards the end of 2015. However the latest report from the Bank has stated that it is unlikely to see an increase in rates at least until the end of 2016 and indeed, because of anticipated low rates of inflation, they could record the lowest rates of interest ever known in the UK.
But how would this have any effect on your pension? The answer is quite simple! All pension schemes are based on interest rates and therefore the higher the prevailing interest rates, the better the pension scheme will perform. Conversely, the exact opposite will apply when interest rates are low.
I have recently met more and more people who have taken the first steps to creating a rental property business and so earning money, or in this case a pension, by income from rent. Indeed a colleague of mine along with two other directors of his small business, have decided to invest a considerable amount of profits into rental properties and have totally ignored any other form of pension scheme.
You do not necessarily need to have a considerable amount of “ready cash” to start investing in rental property, particularly if you are only interested in either supplementing your current pension or replacing it all together to provide an alternative to that pension. Indeed you should remember that under newly established laws, you will be able to convert a considerable amount of your existing pension, if not all, into a cash lump sum which in turn can be used to finance your initial renting property business. So let’s look at some of the options that you may wish to consider.
I should stress that throughout this article, I am going to deal purely with the domestic market and not the commercial alternative.
Most people consider the property rental format to consist of purchasing a house or flat and renting it out as one unit. This is probably the most common method but you should also consider an additional one.
A current trend is to take an existing property with say two or three bedrooms, lounge and dining room, turn the lounge and dining room into bedrooms and then rent out the property on a per room basis. Whilst rental would be low for each room, the combined rental of all the rooms would far exceed that of renting the property out as a single unit. The other advantage is that tenants are easier to find since the rental is obviously low and thus easier to afford. This sort of scheme is very popular where students are in abundance but also in areas of the UK which are feeling the worst effects of the current recession.
Property location is extremely important for several reasons. Firstly, you need to establish whether there is an actual demand for rental property in the area you may have chosen. This is not always the case particularly in the more affluent regions of the UK. There is also the question of cost since the further south within the UK you go, the more expensive properties become and whilst higher a purchase price might indicate a higher rental fee, the initial cost of purchase and financing may well be beyond the reach of most people who are considering renting out a property, purely as a form of income.
One final point to consider on location is this. If you wish to manage the rental of the property yourself, then it is obvious that it should be located close to you. However if you are prepared to look further afield and either manage the property yourself or appoint a local Letting Agent then your choice of location does not need to be so limited. The further north you go in the UK the cheaper the property and the greater demand to rent.
When purchasing a property for rental purposes, otherwise known as Buy – to – Let, the rules that apply to a normal private dwelling mortgage do not apply to this form of mortgage.
I have previously written a comprehensive article with regards to buy to let mortgages which will provide further information. In essence, a greater deposit is required for a Buy to Let mortgage and often there are additional fees imposed by the lender which are not applicable to a private mortgage.
I would like to point out that under no circumstances should you use a private mortgage, such as that on your existing home, when you are going to use the property for rental purposes. If you do, and if your lender finds out, you will surely find that your mortgage is cancelled by the lender and it would be difficult to find an alternative.
One other point to consider, since a Buy to Let property is considered as a business, any mortgage attached to it will not be regulated in the same way as a private one. Furthermore, the amount a lender is prepared to grant on a property does not relate completely on the valuation but instead the proposed rental income is used as the main calculating factor.
Always remember that interest rates can go up as well as down and with regards to Buy to Let mortgages, these are normally short-term and you may not be able to increase any rental as quickly as a lender may increase the interest rates on the mortgage.
Consideration of appreciation in the property value is very important and it is primarily for this reason that location is so important when it comes to earning money by rent on a property.
We all are acutely aware that the valuation of properties can decrease as well as increase. Current indications are that property prices are, in general, starting to rise throughout all areas of the UK. In some areas, particularly in the south and south-east of the UK, the rise has been considerable whilst in other areas, particularly in the north of England, prices have been slow to rise. Where I live in Northern Ireland, we have a long way to go to reach anything close to the “pre-crash” valuations and rises have been primarily restricted to the main city areas.
I mention this point that since prices are starting to rise, no matter how slowly, the ideal situation of a property investment is to buy low and sell high. The Buy to Let opportunity is still wide open and now would be the ideal time to start investing in such properties before inflation of prices starts to creep in everywhere.
It all depends what you want to do! You see the name of the game is to provide an income through earning money by rent but you must decide whether this is all you want to do or whether you want to consider turning it into a small to medium sized business.
It is quite possible to generate a rental that is sufficient to supplement a current pension. At the end of the day, you still have the hopefully appreciated value of the property itself when the mortgage is satisfied, and this coupled with the monthly rental may be all you need to meet your goals.
However, many existing and potential landlords are looking at Buy to Let as a business which not only provide income but in the course of time can be sold on as a going concern and quite probably for a considerable amount of profit.
The most famous couple in the renting property business are two retired teachers who between them, have built a portfolio of over 1000 properties. It was estimated that the couple were purchasing nearly one new property a day since the turn of the millennium and they have recently announced that they propose selling the entire business. Rumour has it that they will make a profit of £100 million when the deal is completed. If you are serious about entering the property rental business, then this couple is the perfect case study to learn more about the process. They have taken the interpretation of “multiple properties” to the extreme and whilst it was thought that during the “crash” period their empire might collapse, they have been able to ride through the rough periods and as a result, far from collapsing, the value of their business has exceeded all expectations.
With interest rates the way they are, the normal retirement pension would appear to be in jeopardy.
Unless you are fortunate enough to be in the high income bracket with an inflation proof pension, the average person would anticipate receiving several sources of income comprising a low pension , supplemented by the interest of savings and possible downsizing of their home property. All the indications are that this method of pension is going to prove completely ineffective in the future and therefore more and more people are being forced to consider viable alternatives.
The question is would earning money by rent and so running a renting property business be of interest to you?
As I have tried to portray throughout this article, provided you take into consideration the following main points, there is no doubt that this alternative to a normal pension is seriously one worthy of consideration.
One point that you may have to consider carefully in the future: the proposed introduction by the Government of the Universal Credit will replace the existing system of Social Benefits. Currently, local authorities will pay any housing benefits for which they are liable, directly into the landlord’s bank account. This was a form of security for the landlord since it meant that those social benefit tenants would not fall into arrears on their rent. However Universal Credit will do away with this and such benefits will be paid direct to the tenant. Statistics show that currently 80% of the tenants whose housing benefit was paid directly to them just kept it and failed to pay the landlord. Instead, the local pubs and off-licences would seem to have benefited instead! The moral of this story is to try and ensure that your rent will be virtually guaranteed by the tenant and is not going to form part of a Universal Credit.
Inevitably there will come a time when you will want to realise your investments and sail off into the sunset! In a lot of cases, the landlord will sell each property through an estate agent but this can take a lot of time and incur quite a large amount of estate agent fees.
Another alternative is to sell the business as a going concern to another investor but a third option may offer the best benefits to all concerned. A cash buy of properties is probably the quickest and most effective way to make a final exit from the industry. This is an option of which we are experts in the field and you could do no worse than to give us a call to see if we can help you in this regard when the time is right.