The new budget by George Osbourne is bad news for anyone looking to make a living as a landlord doing buy-to-let. Anyone who owns a second property for the sole purpose of letting it out for profit should be ready for a decrease in income since the new buy-to-let tax has been introduced.
This new law will hit landlords hard, increasing stamp duty on buying a second home (not for residence but for renting out) hugely – by 3% to be exact. Research predicts that landlords will be losing close to an entire year’s income with this stamp duty increase – e.g. if they were to buy a home for £200,000 then the new tax will be £7,500. Under the previous budget the tax on a £200,000 home would have been much less at £1,500.
Does this mean anyone considering buying a second home specifically for renting it out should have a rethink? Not necessarily. Property investment can still be prosperous using legal loopholes; there is a way to cut out the middleman and therefore side-step the new tax. Peer-to-peer companies are making this possible.
So what exactly are peer-to-peer companies?
These property companies enable an investor to avoid banks completely, hence avoiding the tax simultaneously. They work by finding investors to stump up the money for property loans and mortgages (instead of getting a loan from the bank) thus allowing mortgagees to sidestep the tax and still gain interest on their investment.
As well as making great profit, investors are also able to avoid any of the hassle that comes with being a landlord. Difficult tenants and responsibilities are swapped for easy returns of around 5% and if that wasn’t enough benefit, investors also have the option to place investments into the newly created flexible ISAs which of course means more tax-free returns. It’s no wonder this method is becoming so popular – and it is set to become even more so after the announcement of the budget.
Is it still a good economic decision to invest in property?
This is a raging debate against professionals in the property industry currently, and opinions differ considerably between individuals.
Owing to recent stamp duty and tax changes, landlords cannot avoid paying huge charges, meaning it may not be economically viable to buy a second property for investment. However, property is still one of the safest investments to make and people are keen to continue doing so profitably thanks to P2P’s.
According to Ian Thomas, director and co-founder of one of these peer-to-peer companies, investing in property is still an easy way to make a hefty profit. Not only does property investment provide positive returns, but as aforementioned, it cuts out all the negatives and extra responsibilities of being a landlord.
He argues “you don’t have to worry about Stamp Duty, Capital Gains Tax, or gaps in tenancies. And you’ll never get a call from a tenant in the middle of the night about a broken down boiler. Instead you do get to enjoy a great, consistent return, and can diversify across a range of different properties much more cheaply than if you wanted to build your own traditional property portfolio.”
Any potential pitfalls?
It is unavoidable that most investors who go through P2P companies rather than banks will have been rejected by a bank in the past, hence their decision to go peer-to-peer instead; this unfortunately makes them a much higher risk and they are more likely to default on payments.
Danny Cox, chartered financial planner said:
“Most people have exposure to residential property through their own home, so firstly investors should be questioning whether they need more of the same asset class. P2P property loans are amongst the higher risk of personal peer to peer lending, since these are, in effect second mortgages and not investing in property at all. Borrowers have gone done this route as they are unable to borrow more via their mortgage themselves. And there is always a good reason why a bank or building society won’t lend more.”
Investors too also risk losing out, as peer-to-peer companies aren’t part of the Financial Services Compensation Scheme; essentially if they go bankrupt, investors have no way of getting their money back.
All investment is risky – fact – and you can never be completely certain that your money is safe. Investors must simply do their research and consider their options based not only on what they have to spend, but also the current climate in which they are hoping to buy. In light of Britain’s predicted incoming property dip, experts urge investors to proceed with caution. Regardless of this, if a new landlord wishes to partake and benefit from buy-to-let, due to the new buy-to-let charge, peer-to-peer companies are the only way to go.