Property investing doesn’t always go smoothly. Just like other forms of investment, there can be pitfalls for the unwary individual. So, in an attempt to forewarn you, here are some of the most common:
Buy to rent investment
Thanks to the current housing shortage in the UK, this is an extremely popular strategy right now. Many developments are underway with the sole intention of renting out apartments once complete. This is a high-yield strategy – but only if you are prepared to sit and wait for your returns over a number of years (three to five, at least), since the cost of the mortgage initially will be very high.
The way to get around this is to put down as large a deposit as possible, or reinvest some of the cash in a traditional buy to let. Otherwise, hold on to your day job!
Buy to let and mortgage interest rate cuts
Landlords have been losing tax relief on mortgage interest payments at a rate of 25 per cent a year since 2017/18. By 2020/21, the relief will have been phased out completely with all landlords able to claim a basic 20 per cent tax reduction. Unfortunately, it will result in many landlords being pushed into a higher tax bracket.
One way around this is to become a limited company where, instead of individual sole trader tax, you’ll be eligible for corporation tax (which is currently lower and is set to reduce even further in the near future). However, you may have to pay capital gains tax for the switch.
One way to prevent being pushed into a higher tax bracket is to transfer the property into a spouse – or another family member’s name – if they are currently a low tax payer.
The best way to mitigate the cut to mortgage interest rate is, of course, to not have a mortgage at all. One way for portfolio landlords to achieve this is to sell off a property to pay off as much as possible of the mortgage on an existing property.
HMOs and council restrictions
An increasing number of local authorities are restricting the number of HMOs in particular locations. This is in a bid to encourage a mixed residential make-up, and therefore generate more of a community feel in these areas.
Another potential pitfall with HMOs is the amount of maintenance and upkeep necessary – even if using a management company, you’ll still need to be kept abreast of what’s going on because after all, you are the owner and therefore, you are where the buck stops. HMOs must, for instance, have regular fire inspections, annual appliance checks and be subject to impromptu checks by council officials. Failure to comply could mean losing the licence to run a HMO.
The way to get round this is to find someone with experience, who you trust to manage your HMO.
Student pod investments
Developers often offer large returns for purpose-built accommodation. Many cities and towns in the UK do have large student populations too. Many of the pods are off-plan though, and you don’t know how effective the management company will be.
To protect your investment, sign up with a company who have already produced student pods that you have had a chance to look at, and who have a stellar reputation.