Getting customers out of their “dream” of buying to rent



Real estate prices have skyrocketed during the pandemic as people continue to struggle for their first home or the perfect country residence.

Average home prices have jumped 9.5% in the year to May, spurred by the government stamp duty holiday and the desire for larger homes, according to figures from the lender Halifax. The UK’s seemingly endless love affair with homeownership is alive and well.

But it doesn’t end with just one house. Advisors report that client interest in the buy and lease market is also alive and well, despite a less favorable tax regime imposed by then Chancellor George Osborne in 2015. In the one of his last acts as chancellor, Osborne cut tax breaks on mortgage interest. payments leading some commentators to wonder if he killed the dream of buying to rent.

However, as Clémence Chatelin, Paradigm Norton Senior Financial Planner, says, some clients are still excited to buy to lease. But she doesn’t understand why.

If it’s an advisor’s role to facilitate their clients’ financial hopes and dreams, bringing them back to earth is also part of the job, Chatelin says.

“Financial planning is all about providing peace of mind, making life easier and having a purchase to lease is not conducive to that.

“There are several aspects to this. Most of the clients we work with at Paradigm Norton are delegators, they want their business taken care of, which buying-leasing probably doesn’t give you. You have to pay off a mortgage, find tenants, and tenants can be unpredictable. Add to that the accountant or the accountant. “

Châtelin adds that being an owner can happen by circumstance – keeping an asset after starting a new relationship, for example – it is not an easy path for investors.

“I can relate to these things – sometimes life is that way. But becoming an active real estate entrepreneur can create more of a hassle. Overall, it seems like a lot of work.”

She adds that if clients need to free up capital, they would need to sell, which can be time consuming with trades potentially failing.

“Another aspect that is not talked about with rental buying is in the context of the UK housing crisis. Buyers continue to take properties off the market and push up prices for the generation looking to buy, there is a social aspect to it.

Chatelin points out on a Twitter thread she posted in early June that drew support from fellow advisors who, for the most part, supported the idea that customers should avoid the lure of the buying market for location.

West Riding Personal Financial Solutions Managing Director Neil Liversidge urges clients to think through all possible outcomes before becoming a rental owner. He wrote a pamphlet on the subject describing things to think about.

He says the fantasy and the reality of buy-lease are very different. The brochure lists changes to taxation, including the previously mentioned reduction in tax breaks on mortgage interest payments, as well as changes to capital gains tax and inheritance tax, as well than stamp duty surcharges.

It also describes case studies where things did not go as planned for rental investors.

Liversidge says: “When it comes to our clients, we tend to deal with nice people and we don’t want to see them rip off, harass and endure the kind of heartache that we and others have endured.

“The main thing, however, and it is a sad fact, is that the sentence “Those who praise, feel” even applies to a lot of nicer and more responsible tenants. Most reasonable people will understand why home ownership has become so socially conflicting.

“Those who are not homeowners, but aspire to be, see their dreams become less attainable by the fact that so many previously affordable properties have been purchased by private owners. their ability to save a deposit and thus move up the housing ladder.

But he adds: “I don’t despise tenants. I grew up in a town hall. My parents, born in the early 1920s, moved there in 1955 after living the first ten years of their married life in a privately-rented slum.

“Like most of the council’s early tenants, they felt undying gratitude for renting a decent home and considered it their life mission to keep the place in good repair for the council who had been kind enough to provide it. This kind of mentality, however, is very rare among renters today.If you expect it from any tenant you rent to, be prepared to be disappointed.

Chatelin explains that Paradigm Norton investigated the market a few years ago and concluded that it was not attractive to typical investors.

“We looked at the average UK property price and the average return on a growth portfolio. In the long run, investing money in the portfolio would have been much better with much less hassle. “

Other ways to invest

LEBC Public Policy Director Kay Ingram said Pennsylvania that property-hungry clients would benefit from investing through a fund or a residential REIT: “Owning a rental property involves an ongoing liability to the tenant, which even if delegated to a managing agent can take a lot. of time. The government has gradually made rental conditions for private owners much less attractive in recent years (see box).

“This includes increasing taxes on secondary property and imposing additional responsibilities and liabilities on owners while reducing the legal protection they enjoy to maintain access to their property,” she said.

“If someone is interested in residential property as an asset class, getting it through a residential fund or REIT is a lot less risky and time consuming than owning a single property. It could also be held in more tax-efficient packaging. “

Ingram adds that the average gross rental yield is “only around 3% of the property’s value”, leaving little room for additional costs, rental processing time or the risk of loss of rent if a tenant cannot afford to pay or there is a long period of inactivity.

“While house prices have risen by more than 10% this year, the capital gains tax on any capital gains made makes it an unattractive investment that presents a much higher risk than it is. generally think so, ”Ingram said.

Armchair investors

Real estate offspring leader Julian Watson said the tax regime changes have resulted in a mass exodus of homeowners with one or two properties.

“In our experience,” he explains, “the change in the tax regime from buying to renting has resulted in a significant reduction in the number of wheelchair investors with one or two properties. These investors appear to be leaving the market.

However, he adds that investors who own multiple properties are still on the game: “Timeshare investors are increasingly exploring ways to transfer their existing properties to public limited companies and buy using corporations.”

Châtelin concedes that for some customers it is “on their street” and, after all, their decision – but as the desire for a simple life grows, even wool-dyed, enthusiasts might want to change course. .

“We have a client who has a real estate portfolio, he has an entrepreneurial spirit. We put that in place for him and he really appreciates it. But he’s not at the stage where he wants to simplify it. life.

“Over time, clients tend to default to saying ‘let’s make it simple, easy, less hassle’. They realize they have better things to do in retirement. But, in the end, it is. is their money, but of course they are free to choose what they want to do. “





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