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Introducing Education
If you are going to invest in buy-to-let you will need some education and not just from books.
Also one seminar or course from one source will not necessarily be enough just as one book on any subject is seldom if ever enough.
Do not be misled into thinking that self-education is good enough unless you are prepared to pay, often dearly, for the mistakes that you will make. Mind you, you will still make mistakes even having spent money on a course or seminar, it is just that they, the mistakes, will probably not be as expensive.
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Why do you need educating? Buy to let is very complex, for reasons I will cover later, and yet needs to be able to be compared with any other form of investment so that any investor can make an informed decision and understand the risks.
Shares for example can be simple. You buy a share for £ 100.00, it pays a dividend of 5% so you receive £ 5.00 at the end of the year, which is 5% of your cash investment, less any income tax and the share increases in value by 5% so you have made a capital gain of £ 5.00, which is also 5% of your cash investment, and if you sell your share you may have to pay CGT dependent on the amount of the Gain.
Property is very different. You buy a property for say £ 100,000 and receive a rent (dividend) of £ 5,000 (5%) out of which you will have to pay certain costs before arriving at the net amount on which tax is payable, and this may be as low a 2-3% based on a 5% rent. If the property in empty for any period your rent will reduce as will the percentage return, a share cannot be empty. If your property requires any repairs again your net rent will reduce as will the percentage return, you cannot repair a share.
The capital gain position is similar to shares provided that you bought your property with cash, if the value rises by 5% then you have made a gain of £ 5,000.
The major change to comparing apples with apples comes into play when you borrow part of the cost of buying the property. Such borrowing is common with property but generally not as common with shares.
Assume that you borrow 75% of the cost of your £ 100,000 property so you are only investing £ 25,000 of your cash, the returns as percentages of your cash change dramatically.
You will pay interest on the amount borrowed which may reduce your 3% return on the cash above to 1% or £ 1,000 but that £ 1,000 is not a return on the £ 100,000 cost of the property but on your cash of £ 25,000 and £ 1,000 is 4% of £ 25,000, so in percentage terms you are better off.
In the case of capital gain, if your property still increases by 5% (£ 5,000) then the £ 5,000 becomes a percentage of your cash of £ 25,000 or 20%.
For the purposes of these examples I have ignored any transaction costs which will be higher with property than shares but would be amortised over the period that the property is kept.
This is a very simple example of why any investor needs to understand the financial dynamics of buy to let. There are many more factors to take into account each of which can impact on the level of risk, performance & net of tax income to mention just three points.
Unlike shares, there is also a whole raft of laws & regulations that you need to know about, some of which are criminal law and, like shares, you need to know or learn how to pick a good one, that is a property & a tenant to make it work.
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