-

Thursday 18 January 2018

I was considering buy-to-let but don’t want the hassle of being a landlord

For almost two decades buy-to-let was a favourite investment for many Britons but the allure of bricks and mortar is now wearing off.
A tax crackdown from the Government has deliberately thrown barriers in the way of landlords, making it harder to get into the market and crimping returns for existing buy-to-letters.
Meanwhile, high house prices and tougher mortgage lending have impinged on people’s ability to invest.
However, the profile of the investment returns that buy-to-let has traditionally offered remains attractive – steady income that should rise over time, mixed with long-term capital growth.
But is it possible to get this from the traditional investment world, of shares, bonds, and funds instead? We take a look.
Why buy-to-let has got harder
The past two years have seen a raft of changes to the way landlords' finances are treated.
In April 2016 the Government introduced a 3 per cent stamp duty surcharge payable on all buy-to-let property purchases, dramatically hiking the amount of cash needed to invest.
Then the Bank of England toughened up the rules governing buy-to-let mortgage lending, with lenders shifting rental income required to cover mortgage payments up to 145 per cent from its previous level of around 125 per cent.
Perhaps most importantly for many, in April this year, the Government started to take away full tax relief on mortgage interest from landlords as well.
Previously, mortgage interest paid was taken off annual rent and income tax was paid on the rental profit remaining.
Now, landlords must add rental income to their other income to decide their tax rate and pay tax on this, with a mortgage interest tax credit given.
Tax relief will continue to decline over the next three years, eventually being replaced with a flat 20 percent tax credit available to landlords by 2020.
For those in either the higher-rate or top-rate tax bands, this is a significant shift, and it can push some landlords up a tax band.
There is evidence already that some landlords are selling because the sums simply don't add up anymore.
In September, the Bank of England introduced rules that apply to landlords with four or more properties, effectively limiting the amount that landlords can borrow across their portfolios.
Combined with high house prices making an initial investment far more expensive than 10 years ago, these changes have put pressure on the yields landlords get from their properties - particularly in the South East and areas of the country where property is most expensive.
Previously rental yield returns of around 6 per cent on buy-to-let were standard. In some areas of the country, buy-to-let now yields less than 2 per cent - significantly less than inflation.
What investments can offer similar returns?
Bonds
Bonds traditionally serve as the safe anchor of a portfolio and provide a reliable source of income.
They are essentially IOUs, as you are lending money to an entity - the UK government or a company, for example - which, in return, offers a fixed rate of interest called a coupon.
Bonds traditionally do not suffer from as much volatility as shares or equity funds and it is much harder to cut coupon payments, whereas dividends from shares can easily be axed.
What's more, in the unlikely event that a bond issuer goes bust, bondholders can get their money paid back ahead of the company's other creditors, while shareholders will lose their investment.
The safest bonds are considered to be top-rated government bonds, but these also often pay the lowest yields. A ten-year UK gilt currently pays 1.24 per cent.
Bonds offer less opportunity for capital growth than shares, where the price can rise as a company grows its profits or becomes more highly valued by investors.
If you buy and hold a bond to maturity your principal investment is returned to you in full. The investment's return comes from the coupon payments promised - but the bond's value can rise or fall on the secondary market, depending on how highly investors prize that payout at any given time.
If you buy bonds through a fund, then the manager will typically seek to generate a return both from the coupons paid and by buying and selling in the secondary market.
shares
Shares are typically viewed as the growth engine of a portfolio but some also offer income opportunities through dividend payments.
Those seeking to invest in shares for income ideally want a good track record of meeting dividend pledges and growing these payments overtime.
Is your dividend safe?
Dividend cover is a good metric to measure whether a company can pay what it has promised and grow dividend payments in the future.
It is the ratio of a company's net income over dividends paid to shareholders.
When dividends exceed profits the ratio is below 1.
A figure comfortably above 1 suggests dividends are sustainable.
Kotaro Miyata, investment director at M&G Investments, says: 'The potential for long-term dividend growth is our priority when we analyse companies, not the yield today.
'Investing in dividend growers, either on a global or regional basis, has been a successful strategy which has rewarded investors with the favourable combination of rising income and capital appreciation over time.'
Many investors are guilty of being over-reliant for income on a handful of stocks that sit in the FTSE 100, but there are dividend gems beyond the UK's biggest companies.
Miyata said: 'In an environment where many of the UK’s largest companies, in particular, the oil majors, are struggling to grow their dividends, we find more compelling investment ideas lower down the company size spectrum where the opportunities for long-term growth are considerably better.'
The main risk with shares is volatility.
A company's share price can rise on good news and long term the ability to put money to productive use allows companies to grow profits and see their value climb.
But shares will most likely fall on bad company news, or a wider stock market malaise, and companies looking to protect their balance sheets when bad times come will often cut dividends.
Property funds
Property funds invest in bricks and mortar. Typically, however, this is not residential homes, instead they own shopping centres, offices and warehouses.
Many funds own the properties directly, but some invest in the shares of companies that own the buildings instead.
Property sits somewhere between shares and bonds. It can have an income return that will rise with inflation from rent and the potential for capital gains, but property prices themselves can be volatile.
One of the problems that investors have faced with property funds in the past is that the assets they own can take time to sell and if there is a sudden rush for the exit this causes a problem for managers who do not want to become involved in a fire sale.
This has led to some investors having their cash locked into funds temporarily at times of great market stress, something which happened during the financial crisis and also after the Brexit vote.
Real estate investment trusts, or Reits for short, are a structure for property companies. Reits have a special tax status that requires them to pass on at least 90 per cent of their property rental income as dividends to shareholders. In exchange, Reits do not have to pay corporation or capital gains tax on their property investments.
These are typically, however, individual property companies traded on the stock exchange and their value can rise and fall substantially.
Why investing in a fund can pay off
If you are looking to replace or replicate buy-to-let returns, diversification is important.
If you just invest in one company, then you are heavily exposed to its fortunes.
A portfolio of investments provides some protection against any single one doing badly.
Ideally, you should diversify across assets as well as investments. Holding shares, bonds, property and other assets can generate a healthy income and capital growth, while meaning that you are not too reliant on one part of the investing universe.
Building a diversified portfolio is tricky, so it is worth considering outsourcing this process by investing in a fund. The fund manager will draw on their professional expertise and team of experts to choose investments for you, do the research that needs to be done and decide when to buy and sell.
With thousands of active investment funds, investment trusts and index funds to choose from, there will be some that cater to your investment goals.
It is also possible to choose multi-asset funds that will mix shares, bonds, property and other assets for you.
Making sure that you pick a fund that is right for you and not selecting one because everyone else is doing so is imperative. Your choice should be guided by your risk capacity and investment horizon - and if you have any doubts, speak to a good independent financial adviser.

0 comments:

Post a Comment