Your Pension could now buy a Buy to Let property!

In a recent article, I mentioned that pension rules are changing this April. It certainly created a few emails, with people asking questions about it. Therefore, this week, I want to look a little deeper into the subject of your pension and the Derby property market.

George Osborne, in last years’ Budget, announced pension reforms that come into effect this April, which will give people with pensions unprecedented access to their pension pot and the freedom to look for alternatives. In a nutshell, after the 6^th of April, anyone aged over 55 will be allowed to withdraw all or part of their pension pot and spend it as they wish. Until now, you were allowed to take out a quarter of it and were forced to buy an annuity policy with the rest.

However, my readers always know that I like to tell it ‘as it is’. There are always two sides to a story, good and bad. Let me tell you the bad news first. There are some hefty tax implications by taking money from your pension pot. As before, as per the old rules, the first 25% can still be withdrawn from the pension pot tax free but, here is the sting in the tail, if you take more than a quarter of your pot (25%), anything above that initial 25% level will be taxed as income. So if you took the whole lot out, the first 25% will be tax free but the remaining 75% will be taxed at your income tax rate of 20%, 40% (or even 45% if you earn over £150,000 a year).

..and now the good news!

Under the old scheme, if you bought an annuity, when you died your annuity normally died as well. You would have no asset to pass on to your family. Also, the returns from pensions are awful at the moment. The best rates according to Hargreaves and Lansdown (big wigs in the City) state if you were 55 years old, the best rate you would get on your annuity pension would be 4.4% fixed for life (so it would never go up) or 2.2% but the payment would go up with inflation.  The sort of rates (also known as yields in the property investing game) being achieved in Derby are in the order of 4% to 7%, and they tend to rise in line with wages.

The other aspect of property investment is how the fact property values have risen consistently over the last 50 years.  According to the Office of National Statistics, the life expectancy of a 65 year old male in Derby is 18.4 years (its only 16.9 years in Nottingham). If we roll the clock back 18 years 4 months to November 1996, property values in Derby have risen by 153.1% to today .. you wouldn’t have had that with your pension!   But this is the biggest win, even by taking a hit in income tax now,  by buying a property, you buy an asset that you can pass on to your family when you die.... (or the cats home if they aren’t nice to you!).

So where next? It totally depends which strategy you are going to look at, one strategy is to look to achieve relatively small rental returns (ie low yields) in an up market area which has decent capital growth or, alternatively, another strategy is to buy properties in not so good areas known to produce a high returns (ie high yields) but low capital growth (ie how much the value of the property goes up). Now, I am not financial adviser, so cannot offer financial advice on what the best thing for you with your pension is. However, I can share my knowledge and experience of the Derby property market, what to buy, what not to buy and where to buy etc etc.  

My thoughts on the Derby Property market can always be found on the Derby Property Blog! 

Is home ownership inevitable in Derby?

“You have to rent where you want to live, or buy where you don’t want to live.”

After the end of the Second World War, just over a quarter of the UK population owned their own home, the rest rented from private landlords or the local Council. If someone told you in the 1970’s and 1980’s that they rented, they were considered a second class citizen. Everyone wanted to own their own home.. it was the done thing. We think that home ownership will inevitably happen, but it won't.

It all changed in the 1970’s, when two things happened. Firstly, the number of people who owned their own home broke through the 50% barrier in 1971 and by 1981 it was at 57%. Tied in with that, the average house prices in Derby were doubling at one point every four years in the 1970’s so property and profit started to feed off each other.

To put that growth in context, if we were to look at the last 85 years in Derby, in 1930, the average Derby property was worth £361. It took 16 years for Derby property values to double, rising to £893 by 1946. Another 15 years and the average Derby property doubled again to £1,696 in 1961. The next doubling only took 10 years, as by 1971 the average Derby property had reached £3,449 in value.

It was, as mentioned above, the 1970’s when things really took off, as by 1975 (only four years later) they had doubled to £7,217 and they doubled again to £14,418 by 1980. It took another eight years for values to double again, as an average Derby property reached £30,221 in 1988. Twelve years had to pass until the doubled again in 2000 (£62,181) and just six years to double again by 2006, when they reached £125,111.  Where are we today? The average property value in Derby currently stands at £174,700.

We could blame Maggie Thatcher for making home ownership the ultimate goal, but what we now need to consider is that the country is turning on its head and we need to, as a Country, love renting again. Some blame the banks, but obtaining a 95% mortgage is hard work, but nowhere near impossible. A typical Derby first time buyer would only need to save £5,000 for a deposit and fees and they could buy a very decent Victorian two up two down in Rose Hill in Derby, and it would be over £100 cheaper a month in mortgage payments than renting.

People might say on the surveys they want to buy, when it comes down to it. If you have been living in a lovely three bed semi in Littleover  for £700 per month, but the bank will only lend you enough to buy a terraced house Rose Hill, and don’t get me wrong, Rose Hill has really pulled its socks up over the last ten years, but, some would say, it isn’t Littleover, is it?

What would you do? Look again at the quote at the top... “You have to rent where you want to live, or buy where you don’t want to live.”

With tenant demand only going in one direction, it is probably why more and more people are getting into buy to let in Derby. With the new rules on pensions and the ability to use them to buy residential rental properties from April onwards, this could be the time for you to buy a rental property. You must take advice on your pension from a Independent Financial Advisor (there are plenty in Derby) and you must take advice from people who know what to buy (and not to buy) in Derby to ensure you get the best from your investment. One place for such advice is the Derby Property Blog!

Are Derby landlords on a par with politicians and traffic rangers!

At the time of the last census in 2011, there are 3,401,675 properties in England that were privately rented, of which it is estimated, were owned by over 1.25 million private landlords. The rapid growth of buy-to-let is hugely controversial, especially as only ten years before that, there were only 1,798,864 properties under private renting in England. Buy to let landlords have been held responsible for forcing up property prices and preventing our younger generations from being able to buy. There is also growing resentment toward the billions of pounds in tax relief (estimated to be nearly £10 billion) landlords claim on their mortgage interest tax relief not available to homeowners.

They may be asset rich thanks to recently rising property values, but let us not make the landlords the warlocks they could easily be called! They are not quite on a par with the traffic rangers who raise around £1.4 million a year for the Council! Despite all these benefits enjoyed by private landlords, let us not forget the good they have done, especially in Derby.

Property values today in Derby are still 11.5% below the 2007 property boom levels (2007 being the peak of last property boom before everything dropped in 2008/9), yet inflation has risen by 26% in the same time frame, so in real terms, properties today are 37.5% CHEAPER than they were in 2007. Just think how low they would be without landlords buying all those rental properties in the city.

Interest rates are at an all time low and first time buyers only need to save a £6,000 deposit to secure a lovely 2 bed semi in Chellaston or Oakwood with a 95% mortgage. Forget what the papers say, first time buyers can borrow money on a 95% mortgage and, nine times out of ten, it’s cheaper to buy than rent. So why aren’t people buying?

The number of people choosing to rent, either for lifestyle or economic reasons, has grown over the last 15 years. I also believe they will continue to grow for some time to come, as does every report on the subject. In fact I would go as far to predict the number of rental properties in Derby will have risen from the 15,943 properties recorded in 2011 to 21,800 by 2021. Sound fanciful? Well in 2001, there were only 6,739 privately rented properties in Derby.

It is a fact that we as a Country are more and more turning into a European model when it comes to homeownership, where the norm is renting for the first ten years, as opposed to the norm from the 1960’s to 1990’s, where first time buyers were encouraged to buy as soon as they left school and got a job.

Tenants, in particular, will also feel the benefit from potential changes in the market. The likelihood of interest rate increases in late 2015, existing economic conditions, combined with the uncertainty of new Government manifestos following the General Election in May will result in low demand for people to buy yet also put a dampening effect on increases in rent. As long as landlords buy the right sort of property, that allows for a reasonable yield, decent capital growth, everyone will be a winner. If want a chat about what would make the best sort a property that would offer that in Derby, then please email me on simonj@professionalproperties.co.uk.

Are landlords to blame for Derby's rising house prices?

East Midlands property asking prices jumped by more than £4,000 to £177,100 in February according to Rightmove, an increase of 2.3% from January and 4.7% higher than a year ago. After the traditionally quiet months of January and February, the property market starts to heat up, but talking to some Derby Estate Agents, they are reporting their lowest ever stocks of quality property for sale. However, asking prices have no relation to what property sells for! With property, the definition of price is what someone is prepared to pay, not what the agent thinks it’s worth!

So, is the issue a lack of supply?

Putting aside Derby’s continual housing supply shortage, (we only built 9,866 properties in the last decade but the population of Derby grew by 27,044), this is now, according to some people, being exaggerated by an increase in homes being owned by buy to let investors, who tend to be buying a property as part of a long term pension plan and are more likely to keep it for longer than an owner occupier would. I have also seen unwillingness among homeowners looking to move, to put their own property on the market as they can find few suitable properties to make it worth their while going through the whole moving process.

What I would say to that is that I believe this is the new norm in the Derby property market, and is the consequence of over 35 years of not enough homes being built to meet the escalating growth in household numbers, resulting in a lack of quality homes for sale in many popular areas of Derby.

When one looks at the historic data, in March 2008, there were 4084 properties on the market in Derby compared to today’s 1579. Should we be worried?  Well in March 2010, there were only 1574 properties for sale in Derby but seven months later in October 2010, this had jumped to 2609 properties, for it to drop to 2176 properties in January 2011. The number of properties on the market is a cyclical thing in Derby, it always has been and always will be. As we go into the Spring of 2015, the number of new properties coming onto the market will increase ... just as the daffodils will flower.

So are landlords to blame? Well, on one side of the coin, yes they are. If they buy a property to rent out, that means someone can’t buy it to live in. However, it doesn’t matter if someone wants to live in a property if they can’t afford the deposit and upkeep.. and the youngsters of Derby still need a roof over their head. So on the other side of the coin, if the Council aren’t building any properties and people can’t afford the large deposit for the mortgage, then Derby landlords have stepped in and bought property to rent out to them. Derby landlords have bought 9,204 properties over the last decade (investing approximately £1.6bn buying those Derby properties) and now house 37,828 Derby people in 15,943 Derby properties. Derby tenants are in fact getting a good deal as well, as average rents in Derby are 4.5% below they were seven years ago.

That sounds like a win-win situation for everyone to me. So, we should stop pointing the finger at landlords and start building more properties in Derby.. that is the only answer!

In the meantime, the demand from Derby tenants for Derby property is only set to rise over the coming years. If you want some advice and opinion on where (or not) to buy, please email me or call me on the number below!

A Derbyshire man’s home ..is his semi... or terraced... or his bungalow…

Ok, a slight turn of phrase there on the classic, an Englishman’s home is his castle but when it comes to the UK,  the Brit’s are still a nation of homeowners - although wasn’t it Napoleon who thought we were all shop keepers?!

It is interesting to note that up until the mid to late 1960’s, more people rented their home, albeit mostly from the local council, than owned their own property. In fact, I was surprised to read that in 1921, over 75% of homes in England and Wales were privately rented with the remaining 25% being owner occupied.

 

It was only after the Second World War, when the Beatles were rocking, that people started to buy instead of rent.. but instead of owning our property outright, we borrowed money from banks and building society’s to buy them and the roots of the growth of the private rental sector can be drawn back to the late 1970’s early 1980’s, when the council houses began to be sold off under the right to buy scheme.

Even though 63,979 households in Derby were owner occupied in 2001 and that number had only dropped to 62,765 households by 2011, the percentage of homeowner properties in Derby dropped drastically from 69.23% to 61.37%. Why, because whilst an additional 9,866 properties were built in Derby between 2001 and 2011, a lot of them were bought as buy to let investments, thus more than doubling the number of private rental properties in Derby. In fact, the number of properties in Derby that were privately rented, jumped from 7,464 in 2001 to 17,163 in 2011!

With stagnation in the number of people who own their home in Derby and no more council houses being built, this is increasing the number of people looking to renting, as everyone needs a roof over their head. With the Derby City Council house waiting lists being in the 5 to 10 year range for a decent property in a decent location, it shouldn’t be forgotten that it is Derby landlords who house tenants waiting for a council house. Derby landlords do not receive any subsidies from HMRC and income tax is paid on rent paid by the tenant combined these reduce the cost on the tax payer.

However, it’s not all doom and gloom in Derby, as we have noticed more and more of the younger generation are renting, largely because they can‘t afford to buy - raising a deposit being the sticking point for most. Also, a high percentage of the expansion in private renting is due to those who need and want temporary accommodation. There are even a few landlords who rent their own Derby property out for the short term, for ease, and not necessarily purely for profit.

Therefore, with every report stating the rental market will continue to grow throughout the rest of this decade, with high demand and limited supply in the Derby, if you are considering buying a property for investment in the near future in Derby, I am always happy to give you my considered opinion on which property to buy (or not as the case may be) to give you what you want from your investment. If you are a landlord, new or old, I am certainly more than happy for you to pick up the phone or visit me at our office on St. James' Street!

It pays to plan your property investment in Derby

The buy to let sector in Derby, in fact the whole of the East Midlands buy to let sector is doing very well at the moment, but it can be a minefield.

I could regale you with many stories where investors have got it tremendously wrong in Derby, like some modern apartments on Drage Street in Chester Green, that were sold for an eye watering £168,000 in 2005, only to be selling today for £95,000/£97,000, a drop of over 42%. It is interesting to note that at that time in 2005 for £165,000, you could have bought a lovely 3 bed bay fronted semi in Littleover or a four bed detached house in Sunnyhill. A two bed apartment for the same price as a decent semi or nice modern detached house, doesn’t in hindsight, quite stack up. The thing is, I still see mistakes being made on a day by day basis in Derby. If you make even a small mistake, it could still prove to be very costly.

So what should you buy in Derby? One option is Houses of Multiple Occupation (HMO’s). While they can be profitable, chiefly in the student market with Derby University students, they can make things much more complex and costly, with the need for HMO licences etc. If you look back at some of my previous articles listed on ‘The Derby Property Blog’, you will see a lot of interesting facts on which types of properties let well, as well as sell well!

Mortgage rates on buy to let are really low at the moment and for the right property and person you can get rates below 3.9% if you put down a decent deposit of 25%, but the best rates are for deposits of 40% deposit and, as I type this, you can get a 5 year fixed rate buy to let mortgage from the Post Office for 3.65%. Also, the deposit will ensure you have plenty of equity in the property, if the property market stagnates in the future. The important thing to remember is the amount you can borrow is driven by the rental income, so it is vital you can identify a property with a decent yield that lets easily.

Finally though, if are investing so much time and money in building wealth for you and your family, it is equally important for you to identify ways to protect it. Do not forget, if you spend years building a successful property empire in Derby, when you pop your clogs, your family could face an inheritance tax bill of 40 %, which they would have to pay within six months of the death. In a buoyant market, selling in six months is not an issue, but what if the market was like it was in Derby between 2008 and 2012, when things took seasons to sell, not weeks. Quite apart from losing nearly half of the assets you built for your family to the tax man, if they had to sell some of your portfolio,  possibly at a discount because the taxman wanted his money so quick, it might be wise to consider some life insurance that will offer protection against inheritance tax.

There are plenty of good advisors in Derby that can help you with the mortgages and life insurance. We aren’t one, because we are a letting agent, but what we can help with is choosing the right  Derby property to buy. It’s in our interest to do so, because if we offer the best advice and opinion, without any conflict of trying to sell you anything because we aren’t estate agents so have nothing to sell you, you might consider, although there is no obligation, to trust us to manage the property.

Which value of properties are actually selling in Derby?

Prices up, prices down, prices stable… the newspapers are full of good news, bad news and indifferent news about the Brit’s favourite subject after the weather... the property market.

The thing is, the UK does not have one housing market. Instead, it is a patchwork of mini property markets all performing in a different way.  At one end of scale is London, which has seen average prices grow in the last twelve months by a shade under 19% (and again that is an average because some Borough’s in London have risen by 26%) whilst in the land of daffodils, by contrast, Wales, only saw a 2% increase in property values, although in the Merthyr Valleys they dropped by over 11%!

Well, we can’t ignore the rest of the UK, and we can’t forget that the Chancellor’s Stamp Duty reforms have polarised the London property markets above £1,000,000 because at the top end of the market, punitive Stamp Duty charges will dampen demand further. Whilst the Bank of England warned of the growing London property price bubble in the Spring of 2014, even talk of a recovery in some areas was premature. In 2015, irrespective of where you are in the UK, one story will unite the patchwork quilt of markets –  really slow property value growth.

So, what about our own patch in this patchwork market, Derby? Well, we haven’t had the December figures from the Land Registry yet but the last few months’ activity and prices achieved would suggest neither house price growth nor drops.  In fact, most sellers are buyers anyway, so if you need to take less for yours, you won’t have to pay as much for the one you want to buy ... and that is good news for everyone as most move up market when they move. This is also great news for landlord investors, as they can bag a bargain as well!

The question you should be asking though is not only is what happening to property prices, but which price band exactly is selling? I like to keep an eye on the property market in Derby on a daily basis because it enables me to give the best advice and opinion on what (or not ) to buy in Derby.

 

Over the last two months (56 days to be precise), 231 properties with asking prices under £100k have come onto the market in Derby and 12.9% of them (30 properties have a buyer and sold stc. Between £100k and £150k, of the 284 properties that come on to the market, 21.8% of them (62 properties) have a buyer.

The £150k to £200k price range has seen 173 properties come on to the market, and impressive 24.8% have a buyer (43 properties).

The more expensive £200k to £300k range has seen 35 of the 158 properties that came on to the market find buyers (22.1%) but the £300k+ range has been slower, with only 9.8% (8 properties) of the 81 that have come on to the market, find buyers.

The next three months’ activity will be crucial in understanding which way the market will go this year and I honestly believe we will not see any house price growth or drops this side of the election. Election or no election, people will always need a roof over their head and that is why the property market has rode the storms of oil crisis in the 1970’s, the 1980’s depression, Black Monday in the 1990’s, and latterly, the Credit Crunch together with the various house price crashes of 1973, 1987 and 2008.

And why? Because Britain’s chronic lack of housing will prop up house prices and prevent a post spike crash.... there is always a silver lining when it comes to the property market!