If you are thinking about buying your first property to let or expanding your portfolio in 2014, you need to consider the tax implications of adding property to your wealth, then you need to work out the risks and rewards of buy to let investment, and finally, know your exit strategy.
Tax Implications of Adding Property to Your Wealth
You need to know that any property you add to your 'wealth' will be taxed. And the tax you pay won't just be the net income on rent or the capital gains on the property. It may be that the property income or capital gains adds so much to your wealth you end up paying more tax because you lose benefits.
For example, ฝากขายที่ดิน if you earn £50,000 and have kids who receive child benefit, then adding rental income to your property may well mean you lose the benefit. If you earn over £100,000, then the rules on personal tax allowances may mean you end up losing tax relief rather than benefiting from it.
Only a property tax expert can help you, so get started by reading our Buy to Let Tax Checklist.
Risks of Buy to Let
Many people get excited at the thought of buying another property, and there are plenty of newspaper reports around telling you it's a great idea. However, there aren't enough reports explaining the downsides of buy to let, so here's a list to make sure you know what you are up against:-
Property prices can fall by up to 20% - so make sure you have a back-up plan if this happens. Rents can fall by up to 20% too - so make sure you are still cash flow positive in this case. You might have a low interest rate of around 2.5 to 3.5% but when interest rates rise, rates are likely to be around 5% long term and could reach 7%. Tenants might not pay their rent - have you savings to cover costs if this happens? Tenants can cause serious malicious damage to your home - make sure you reference tenants carefully, don't go for cheap options.
To cover yourself from the risks of buy to let, read our Buy to Let Insurance Checklist.
Know that if you invest in a property with a 75% loan to value mortgage, at rates of 5%, properly maintain it, then with the average 5.5% yield, your net income is likely to be zero. This is fine if you are investing for capital growth, but means you need a 7% plus average to secure an income or a lower loan to value such as 50%.
Rewards of Buy to Let
Although there are downsides to buy to let, there are upsides too. Capital growth, on average, is around 4-5% per year in most areas over time, so ideally, you want to buy a property where you can 'force' capital growth through renovation or adding space to give you an immediate uplift in value. In addition, if your rental income is 7% plus, then you are likely to make enough money to cover all your costs and net some extra cash.
For the future, property price increases are expected to be from 4 to 8% for 2014 and the same for 2016, so use these figure to work out what your property investment is likely to deliver over the next couple of years. To make sure you analyse any deals by using our checklists.
Your Exit Strategy
Finally, it's essential NOT to buy a property without knowing when and how you will exit from it. Working out if you need to pay off the mortgage and secure the income by the time you exit or if you want to sell up. In this case, you need to know the right time to sell without incurring a huge tax bill.
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