When making investment decisions, you should always seek financial advice first to make sure you are aware of all of the risks involved, and that the product is suitable for you. When it comes to buying a property as an investment, this rule is often forgotten because people think seeing a mortgage adviser is enough. This is not the case, because finding the right mortgage is one thing, but receiving advice on investing into a property is another. Even if you find the best mortgage in the world, and the mortgage is a suitable solution to fund a gap, it is not to say actually buying the property as an investment is also suitable.
In my opinion, buy to let investing isn’t right for the vast majority. There are many risks involved, and they all need to be considered carefully before you proceed. Firstly property prices could keep on going down for many years to come. I wrote last year how many of us falsely thought house prices had hit rock bottom, yet we still don’t know where the bottom is until we’ve ridden the rollercoaster and can look back on where we have been. In the past 12 months the house price index has again dropped over 2%, and so the same still applies, we don’t know how low they are going to go. When you take into account inflation, you would have lost around 5% in real value from last year. And this is just a gradual decline. Something major could affect prices, such as a change in tax. If holding rental properties became unattractive because of a change in tax, there would be floods of properties being put on the market, bringing prices down dramatically and suddenly.
Another risk is that your tenant won’t pay their rent. When you work out how good of an investment you may be able to make, most people will assume the tenant pays their rent and it appears to be a good idea. If they don’t pay their rent, you still have a mortgage to service, you may have to spend money on legal fees to get them out, then you need to pay to find another tenant. Altogether you’re looking at potentially thousands of pounds in costs and losses.
Other risks include not being able to find a tenant, physical damage to a property, falling rental yields, increasing mortgage interest rates and the illiquidity risk of not being able to sell a property quickly if things start getting tight.
When speaking to people, it can be difficult to get the message across regarding the risks. Most people have already made their mind up and have an ‘it wont happen to me’ view on things. The thing to remember if you do come to see us for advice regarding a buy to let property investment, and we question the suitability of buy to let investing for yourself, is that we make money from selling mortgages. If you don’t take a mortgage out, then we don’t make any money, so if we try and put the frighteners on you it is for a good reason and we are worried that it may not be the best course of action.
For all the risks it carries, buy to let investing can work and it can work in two ways. You could either be lucky, or it could be the right solution for you. We will never recommend buying a property hoping you will be lucky. We will however recommend property as an investment when we think it is suitable for you and you are in a financial position to take on the risks which are involved.
Kieron Bassett Financial Services has two Independent Financial Advisers who specialise in mortgages and investment advice. Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or visit www.kieronbassett.com.
Jason Hinde DipPFS
3rd September 2012
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