A diversified and well constructed portfolio is critical to income flow at retirement. In this part of the blog series we look at ways to boost your retirement income by investing in property.
Property investment
Historically, investing in buy-to-let property has been an excellent choice for at least part of your portfolio. However, in the last two to three years, there have been significant changes in the environment that property investors find themselves.
Some of the issues include:
- New tax regulations which increasingly disallow mortgage interest as a deductible expense.
- Agent not being allowed to charge fees to tenants which in turn means that they have to recover more money from landlords.
- Ongoing legislation.
- Charges to sub-let apartments imposed by the head landlord.
- Increasing ground rents, sometimes to extortionate levels.
- Deposit registration regulations, resulting in increased costs and administration.
- More restrictive rules about qualifying for a BTL mortgage, particularly for the over 65’s.
And that’s not including the costs of…
- Inventory on check-in and check-out.
- The fee charged by agents of extending a lease if the tenant wishes to stay, or new fees if they leave.
- Damage and general wear and tear replacement.
- Increasing service charges.
- Void periods (no tenant).
- Tenant damage.
- Lack of rental payment from the tenant.
That’s not to say that all BTL investments are a bad option. The benefit of this kind of investment has, in the past, been measured in terms of capital growth. Right now, we have seen a gradual fall in growth and a reduction in values in some locations – typically London and the South East.
If capital growth is either not available or modest, that eliminates one of the main benefits of property investment. And, as we have already covered, capital growth doesn’t help your need for income, unless you liquidate your investment property and put the funds to more productive, income-producing, use.
Having reviewed your portfolio and deciding that some level of property investment is appropriate, then here’s a quick checklist of tips that will help you generate the most income:
- Buy property mostly with your own funds and as small a mortgage as possible.
- Look for either/both below market value property or properties that allow you to add value right away. For example, turning a large living room into a kitchen diner and using the kitchen as an extra bedroom.
- Manage the property yourself to minimise costs. You’ll experience a big learning curve, but your wallet will benefit.
- If you are ‘handy’, do as many as the small repair and maintenance jobs yourself.
- Be very clear about the minimum net yield you will accept and do not buy any property that can’t deliver that income level. Be honest about the realistic expenses you will incur.
- Choose an older property rather than a new build. You might be tempted by something new but generally new property sells at a 10-20% premium which means that rental yields will be lower than with an older property.
- Buy in your home town, so it is easy to manage, inspect and repair your property. Of course, this may be problematic in terms of achieving the yield you want. This will be a particular problem in London and the South-East
- Develop a network of reasonable priced tradesman and professionals who can do the jobs you can’t, or who can issue certificates without the agents mark-up.
- Buy in an established area for renting where there is a constant demand, and rental prices are easy to establish.
- Insist on 12 month AST tenancy agreements. Agents don’t like them because they lose the opportunity to charge fees every six months. You will also find that you attract more long term tenants who want to stay for years – that’s a precious thing for landlords.
We hope this overview of the property investment market gives you some clarity over the issues now facing investors. What we do find is existing property investors who are now liquidating part or all of their portfolio to invest more flexibly and for higher income; and also remove the problems faced by ownership.
Other articles in this series
How to build income and wealth for retirement: 1. Identify the obstacles
How to build income and wealth for retirement: 2. How to create more retirement income
How to build income and wealth for retirement 3a: Getting the best from different investment classes -Through Shares
How to build income and wealth for retirement 3b: Getting the best from different investment classes -Through quoted Bonds and Gilts
How to build income and wealth for retirement 3c: Getting the best from different investment classes - Through day trading
How to build income and wealth for retirement 3d: Getting the best from different investment classes - Through unquoted bonds and loan notes
How to build income and wealth for retirement 3e: Getting the best from different investment classes - Through savings and cash
How to build income and wealth for retirement 4a: Ways to boost your retirement income - By investing in property
How to build income and wealth for retirement 4b: Ways to boost your retirement income - By starting a business
How to build income and wealth for retirement 4c: Ways to boost your retirement income - By reducing costs and outgoings
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