The rewards and risks of buy-to-let investments

So you’re nearing retirement and perhaps thinking, what next? You may be ready to hit the golf course, take up a hobby or go on a long holiday.

Or you could be considering a new career or even embracing part-time retirement despite building up the full 30-year pension. Whatever your decision, retiring early and living longer poses many police officers with a financial challenge.

Namely, will your pension be enough? It sounds obvious but the key to your financial wellbeing is investing wisely, bearing in mind the risks as well as rewards.

You need to think: why are you making the investment; do you want to achieve capital growth, income or a combination the both; how long will your money be tied up; have you enough money for emergencies; what is your capacity to cope with losses both in the short and longer term, and if the risk is worth the potential return; the impact of inflation; and finally spreading your investments across different asset classes to lower the chances of all of them taking a plunge at the same time.

Savings in cash currently only provides a pitiful income. Many have ploughed money into buy-to-let (BTL) property for good reason, as according to Investment Property Databank, it’s the best performing asset class on a risk-adjusted basis. But what are the pros and cons? Firstly, many of us can’t afford to buy a house outright without a mortgage. This means you’re relying mostly on capital growth because your rental income is swallowed up in interest payments. It also exposes you to more risk if interest rates go up.

Moreover, your investment is locked into the property, which can take time to sell; the time and effort involved in finding the right property and location; there’s insurance and maintenance costs to pay; the property may sit vacant for some time; and then don’t forget, there’s tax to pay on income and capital gains when you sell.

Many landlords have done well with house price increases but there’s also the risk of getting burnt if they go down. However, there are other ways of investing in property, which come without the hassle and high entry costs. But these are still limited. For example, there’s been much talk about Real Estate Investment Trusts (REITs). This is a tax transparent company listed on the stock exchange. It uses investors’ money to buy and manage commercial property such as offices, shopping centres and industrial parks. Secondly, unit trusts, which are not listed on an exchange, are also tax efficient. But you don’t get to choose the type or location of property. A fund manager selects a pool of properties, which track an index.

Finally, there’s something relatively new on the market, where residential properties are bought through crowdfunding. For instance, Property Partner is an online investment platform, which allows multiple investors to come together to buy shares in a property. Properties are purchased already tenanted or for renting, and then professionally managed. Investors receive a monthly income after the deduction of normal costs, such as management, insurance, repairs and maintenance.

Property Partner allows investors to either exit after five years at market value or you can sell your shares at any time on the platform. All the hard work is done for you as locations and individual properties are identified and then listed on the website with photos, floor plans, surveyor’s report and valuation. All financial information is given such as how much income is predicted. The main attraction is that you can choose which properties to invest in. Of course, there are risks including all the normal rental concerns of bad tenants not paying and selling your property can take time. And be aware that the value of property can go up as well as down. One last thought - don’t put all your eggs in one basket - diversify and seek professional advice.

By Rob Weaver, Head of Residential Investment at
property crowdfunding platform Property Partner