INSIGHT: To Buy or Not to Buy to Let
Financial planners are often asked “where’s the best place to put my money?”, unfortunately there is no short answer to a long term question.
Many have already decided the only way is property and undoubtedly for professional landlords and property developers (not the part timers of the early 2000’s) there is a good living to be made.
For everyone else however, TV property shows have convinced everyone it’s the best way to make a quick buck.
Indeed, having a ‘buy to let’ can make fascinating chat down the pub, and if you ask anyone trying to build wealth the purchase of a property seems like a no brainer.
So what is the downside?
For most people property represents long term capital growth and a nice steady income, however when calculating what their return may be, very few factor in the risks and costs associated with borrowing, lack of tenant or bad tenants, property maintenance, insurance costs and other hiddens.
In addition to this, rental income is not what we term ‘earned income’. Meaning that rent from a property cannot be placed into a pension and is therefore very inflexible.
It is only a little further down the line when your property wealth has grown that you start to really encounter problems.
Unlike your main residence, your rental properties will incur CGT which is extremely hard to mitigate.
If you have been diligent and built up a large property portfolio good luck passing it down to the next generation.
Gifting your property to the next generation is like having to decide which of your beloved pets you would most “like” to drown - your choice is inheritance tax or capital gains tax.
So property is not tax efficient, it’s illiquid and inflexible.
This is not to say that property should not form part of your portfolio, indeed it should.
The point is that it should not form your only asset. No-one in their right mind would only hold fixed interest or equities or any other asset class for that matter.
For whatever reason these basic rules of investment diversification seems to be thrown out of the window for properties speculators.
I propose a much more sensible alternative, use property as a portion of your portfolio whilst also holding other assets such as Pensions, ISAs and collective investments in order to diversify your portfolio and make use of as many tax reliefs as possible.
So where property might be profitable for some, it still needs to be treated with caution.
If you need more information on pensions and property contact Jonathan.Beardmore@pearsonlegal.co.uk
Also in this issue of Insight
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