18Return from propertyGetting a returnfrom propertyProperty can be a goodchoice for income <strong>and</strong> growth,but don’t overlook the risksLendersare looking moreclosely at the risks involvedin the loans they make,so it’s no longer so easyto get a buy-to-letmortgage
Return from property 19When it comes to investing inproperty, the main ways to doit are through buy-to-let or byinvesting in property funds aspart of your portfolio.Buy-to-letSoaring house prices oncemade residential property seema surefire way to make money<strong>and</strong> many people invested. Butprice fluctuations in property inthe last few years mean that it’sever more important to weighup the pros <strong>and</strong> cons carefullybefore you take the plunge.Buy-to-let advantagesWell-chosen buy-to-lets can bea good source of income <strong>and</strong>offer the opportunity of capitalgain. The return from a buy-toletcomes from income fromrents <strong>and</strong> a capital gain – orpotential loss – when you sell.During the financial downturn,some property investors overextendedthemselves <strong>and</strong>experienced a funding crisis.These days, lenders look moreclosely at the risks involved inthe loans they make <strong>and</strong> it’sno longer so easy to get a buyto-letmortgage unless thebusiness plan for your propertyletting venture looks sound.Buy-to-let disadvantagesUnless you’re a large investor,you probably have a lot of youreggs in one basket. So anyproblems with the one or twoproperties you own can have abig impact on your finances.Capital riskPutting a large sum into a singleinvestment is high risk. If thevalue of the investment risessteeply, your high-risk strategycan pay off h<strong>and</strong>somely. But ifsomething goes wrong youst<strong>and</strong> to make a big loss.The risk with a buy-to-let isnot simply a fall in house prices.You’re also open to risksspecific to that property, suchas subsidence, the impact ofnearby planning applicationsor a deterioration in thesurrounding neighbourhood.LiquidityClosely related to capital riskis the problem of gettingyour money back. It may beimpossible to sell a buy-to-letproperty quickly. You may needto sell at a cut price or waitmany months or even years.Income riskA residential property will notnecessarily produce a steadystream of income. You needto allow for vacant periodsbetween lettings when norent payments are coming in.You might also have tenantswho are late payers.It’s crucial to pick properties<strong>and</strong> geographical areas withgood letting potential, <strong>and</strong>carefully check potentialtenants before offeringcontracts.Costs <strong>and</strong> timeYour income is not the grossrents the tenants pay. You haveto deduct your costs, such asmortgage payments, buildingsinsurance, maintenance costs<strong>and</strong>, if you use one, lettingagency fees – typically around10-15% of the gross rent. Mostcosts have to be paid evenduring periods with no tenants,<strong>and</strong> there are substantial costswhen you buy <strong>and</strong> sell property.TaxYour rental income ,afterdeducting various costs, istaxable as non-savings income.So, in 2011-12, it is taxed at 20%for basic-rate, 40% for higherrate<strong>and</strong> 50% for additional-ratetaxpayers. Any gain you makewhen you sell will be subject toCapital Gains Tax (18% for anygain within your basic-rateb<strong>and</strong>, 28% for the rest).Unlike, say, a unit trust, whereyou can sell a holding bit-by-bitto keep each year’s gains withinyour annual allowance, you willnormally have to sell a propertyall in one go, so it is more likelythat you’ll have some tax to pay.You can’t put direct holdings ofresidential property into taxefficientwrappers, such as Isasor Sipps.Property fundsProperty funds let you invest small sums as a stake in aportfolio of many different properties run by professional fundmanagers. Property funds come in the same types as otherinvestment funds, for example, unit trusts, investment trusts<strong>and</strong> insurance funds. Your return is in the form of dividends(income) paid from the fund <strong>and</strong> any capital gain or loss whenyou sell your units or shares. Many property funds can be heldthrough Isas, Sipps <strong>and</strong> other tax-efficient wrappers.www.which.co.uk
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