Could a London buy-to-let property save you from pension oblivion? · 06/11/2023
As leading letting agents in London, we spend a lot of time considering the impact of property investment on the financial wellbeing of our clients.
And many clients utilise buy-to-let property investment in London as a pension pot.
So, in terms of your working life, consider this: if you were born in the early 1970’s or late 1960’s, and if you haven’t started to think about it yet, retirement is closer than you think.
In fact, the number of years you have left to work is less than the number of years you have worked.
The basic state pension is worth £115.95 a week for a single person in 2023/16 (or £6,029 a year) and £231.90 a week for a couple (£12,118 a year) as long as your partner has paid their stamp – although there are certain get of jail cards if they haven’t.
As a household, could you live on just over £12k a year? Most of our private landlords in London we ask this question to provide a rapid ‘No’ in response. What would you answer?
Could the London property you’re living in save you from poverty when you reach retirement? A regular income is vital in retirement, and the bricks and mortar you own in London could provide a way for you to finance the rest of your life when you retire.
Our property agents in London advise clients on many issues related to property investment and the finer details of buy-to-let property investment in London.
If you are in your 30’s, instead of saddling yourself with bigger and bigger mortgages, going from your first-time-buyer flat, to a terraced, to a semi-detached and then a larger detached house, you could instead keep your terraced or small semi, turning it into a buy-to-let property, let the rent pay the mortgage, and then rely on capital growth to provide you with a lump sum when you sell the property and retire.
One of the biggest plus points of buy-to-let in London is what is known as leverage.
How does leverage work for property investors in London? Say, for example, that you have a deposit of 25% and the value of the property rises by 3% a year: your gains would in fact multiply to 12%.
However, if property prices in London drop, ‘leverage’ can be catastrophic, as losses will also be multiplied.
Property values in London have dropped a number of times in the last 50 years, but they always seem to bounce back: and for that reason, property investment in BS postcodes must be seen as a long-term investment.
If you had bought a London house in the Spring of 1983 for £40,000, using a 75% mortgage and 25% deposit, meaning your deposit would be £10,000, then today that London property would have risen in value to £225,369 – a rise of 463.4%.
However, when you look at the growth on just the deposit, the rise is even better – instead of 543.9%, we see a rise of 1853.69%. This clearly highlights the positive impact of leverage.
However, buy-to-let property investment in London is not all about capital growth and in retirement, income is more important than capital growth, as rent is the key to a steady income.
So, surely the best strategy is to buy those London properties with the high rents, when compared to the value of the property?
These are called high yield properties in the buy-to-let world because the monthly return is much greater.
So surely they are the best property investment option in London?
Possibly – but the properties that offer these higher yields (in the order of 5% to 6% per year) tend to be in such areas as Filton or Fishponds in London – and historically they haven’t offered such good capital growth when compared to the city average, have a higher tendency for void periods, and such rented properties in London tend to attract tenants that have a greater propensity to be high maintenance.
Therefore, if a high maintenance rental portfolio wasn’t for you, another strategy could be to buy a property in London with relatively smaller rental returns of 3% to 4% per year (i.e. lower yields), but in a more upmarket area such as Redland or Chelsea.
Properties in London such as these tend to suffer from less void periods (i.e. when there is no tenant in the property paying rent) and they historically have had better long-term capital growth when compared to the city average.
Every property landlord in London is different and every property is different. All I suggest to you is do your homework. Ask for advice from leading letting agents in London as standard.
As regular readers will know, I am happy to share my knowledge and experience of the London Property Market, high yields, high capital growth, what to buy, what not to buy, and where to buy in the London Property Market can always be found in my London Property Blog.