‘Why you may need to cashflow the occasional Buy-to Let’

There are more and more articles coming out at the moment warning buy-to-let investors that their investment properties may no longer be self-funding. Once again, trying to scare people off of investing in property.

One such article I read the other day commented that 'amateur landlords who buy houses to let are no longer guaranteed a profitable return on their investment.' As we all know there are never any guarantees on property, which is why if done properly, property investing can give such a large return on your investment.

If it was a guaranteed return then everyone would be doing it, and we don't want that do we?

Another comment made was 'other pitfalls include a tax on your profits.' Well that shocked me as in just eight words he managed to make a profit look like a bad thing!

The main point of the article was very true though, people should understand that at times you may have to fund you're investment. If you are not prepared for that, then you could get into financial trouble. It is very important to allow enough cash reserve to ride out a storm.

Lets look at another investment we are all expected to fund with no guarantee of return, a pension.

I am sure it cannot have escaped your attention that in order to fund peoples pensions the government are intending to increase the age of retirement. They use the line 'we are all living longer now' as a way of selling us this turkey!

What is actually going on is the country is living beyond its means, and one of the ways to get round this is to stop paying people their pension as early as they do and combining this with keeping them working longer. Therefore they are paying income tax for another 3-5 years and helping to pay towards the problem for longer, nice!

Well, its something to look forward to isn't it?

I personally think that the government are going to make pension contributions mandatory for everyone. What this would mean is it probably coming straight out of your wages, they used to call it 'Income Tax' but it'll have some new name to fool us, something like SSPC or 'State Secured Pension Contributions'.

Which is a fancy name for Your State Pension, in other words they are going to take money off of you today wrap it up in a nice shiny package and give it back to you as your state pension in the future.

Anyway I drifted off for a minute there, that's enough of me banging on about something that might not happen as you never know, the money trees that they planted last week might star bearing fruit one day.

Back to the point, in a pension you give money now in order that you will get more of it back in the future, sounds pretty simple. I like the 'get more money back in the future' bit, but I don't like the 'give money now' bit, or the fact that you have to rely on someone else to do 'who knows what' in order that they give you more money in the future.

But nevertheless you are expected to just give up your hard earned for the promise of more money in the future, and if they don't come up with the goods you have no comeback, as has been seen recently in the world of pensions.

If given the choice I would rather fund one of my investment properties by £150 per month than put £150 into a pension, even though the government give you very large tax advantages to do so.

Lets say you own a property that's worth £120,000 with a mortgage on it of £100,000. After all rent, management fees, maintenance of the property and voids you go backwards in cashflow by £1,800 per year. Well, according to the Centre of Economic and Business Research, you are going to make an average of 5.5% year on capital growth until 2020.

So that's 15years of £1800 loss, which comes to £27,000 – to me that is your contribution to your own little pension. But you will make 15 years of 5.5% gain on the value of the investment property, so the property will now be worth £253,931, and after you deduct the mortgage of £120,000 and your years of £1800 (total £27,000), you are left with £106,931!

So if you fund your investment for 15 years, you never put the rent up to cover your loss, then you, without government backing will make £106,931 just using these very conservative figures for house price increases. The average in the last 35 years throughout the country has been approx 11.74%, and that would mean £528,603, less the £120,000 = a gain of £428,603.

Now I am by no means a pension expert, but does anyone know any pension scheme that by putting £27,000 into would give you a pot of £205,463 in 15 years? Let alone £428,603.

If you do, let me know.

Now I don't know about you, but I would rather fund just one property by £150 per month than put £150 into a pension. Because I know what's going on with it and I can do something about it if a problem arises. What can I do if something goes wrong with my pension, write a letter of complaint maybe!

Lets say that after 5 years you took out £27,000 in equity from the property to fund the loss for the last 5 years and the next 10, what would that do to your return? Nothing much, except reduce your pot at the end, so what do you think, would you be better off paying the £1,800 per year? Of course you would, if you can afford it, however, if you can't just refinance it and cashflow it in the meantime.

If you're investment is in property then, when you get to the point of drawing your investment out you don't have to buy an annuity at 'whatever the rate happens to be at the time. You can choose what you want to do, sell, re-finance or do nothing, its up to you.

Buying Property gives you choice!

So the whole point is, losing a little bit of money now doesn't matter as long as you can cashflow it. Also you manage to solve the journalists other point because as you have made an income loss you haven't got the 'pitfall' of profits!