Accidental landlord:is buy-to-let really a better investment than a pension scheme?

There is money to be made by young people investing in buy to let properties for their retirement, but is it a better idea than a traditional pension?

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Several young people I know are planning to invest in a rental property as an alternative to saving for their retirement. One of them, a colleague in his thirties, has been grinning from ear to ear since his offer on a two-bedroom flat was accepted.

But I am wondering, is buying to let really a better investment than a proper pension scheme?

The capital you need to invest in a rental property in London is huge and growing, not only because of rising house prices but also because of the Government’s harsher tax regime for landlords and increasing regulation.

When you invest in a pension you get tax relief on your contributions, but when you buy a rental property you have to pay stamp duty and, if you already own another property, there’s a three percentage point surcharge.

You also have to pay solicitor’s fees, mortgage arrangement fees and survey costs. In addition, several councils have introduced compulsory licensing for rental properties with steep application fees for landlords.

You also have to get the gas appliances tested and you ought to have a qualified electrician check all of the fixed wiring and appliances. In older properties, this is almost certain to highlight the need for upgrades, which could run into thousands of pounds. You will almost certainly have to refurbish and buy appropriate furniture, too.

So with these added costs, can buying to let still be a better long-term investment than a pension? Let’s look at my cock-a-hoop colleague’s planned investment. He’s paying £265,000 for a two-bedroom flat in Croydon, the survey will cost him about £400 and he has to pay a mortgage arrangement fee of around £2,000 and solicitor’s fees of £750. His local council recently introduced a compulsory licensing scheme, so that will cost him a further £500.

As this is his first property he doesn’t have to pay the stamp duty surcharge for landlords, so his stamp duty bill is £3,250. If he already owned another property he would have had to pay £11,200. However, he is looking to buy a home and when he does, he might have to pay the additional three percentage points on that property instead.

In total, his rental will cost him £271,900. As it’s already being let, it comes with a current gas safety record and an electrical safety certificate and the décor doesn’t need updating, so he has been spared those additional costs.

He invested £72,400 of his own money and took out a mortgage for the remainder, so he will have to pay £497 in interest every month plus £200 a month service charge. He will also have to pay insurance and letting agent’s or marketing fees.

The estate agent selling the flat claims my colleague will get a rent of at least £1,500 a month, which would give him a gross yield of 6.6 per cent. However, I have a feeling the agent has exaggerated the potential rent.

Looking at similar properties in the same area, I would say the most he will get is £1,300 a month, but that should still be easily enough to cover all of his costs, his income tax bill, ongoing maintenance and any voids.

House prices in that part of Croydon have risen 16 per cent in the last year and if growth continues at only half that rate, he will double his initial investment of £72,400 in a little over three years.

I don’t know how that compares with a pension plan, that’s not my area of expertise, but based on these figures, it certainly looks as if there could still be money to be made from rental property.

Victoria Whitlock lets four properties in south London. To contact Victoria with your ideas and views, tweet @vicwhitlock

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