The pros and cons of buy-to-let investing

This article is part of
Guide to using property to fund retirement

Tom Selby, senior analyst at AJ Bell, admits it’s easy to see why many people remain hooked on investing in buy-to-let, rather than a pension. 

“Property is tangible, giving some a greater sense of control than investing in funds or stocks, while many will have experienced a boom in the value of their own home,” he suggests. 

“However, anyone hoping to rely on buy-to-let for their retirement needs to be realistic about exactly what’s involved and the potential risks.”

Weighing the pros and cons

He lists the costs and charges associated with owning a buy-to-let residential property, such as:

  • Council tax
  • Stamp duty
  • Ground rent
  • Property repairs and maintenance.

“And the possibility of periods where it will generate no income when tenants move out,” Mr Selby warns, adding: "Anyone investing in buy-to-let for their retirement should consider how they will generate an income in these circumstances. In short – investing in buy-to-let is hard work."

Perhaps those planning for their retirement are too quick to dismiss the possible returns an investment in the stockmarket can generate.

Instead, they assume the property market will continue to work in their favour.

Mr Selby asserts: “When looking at the returns generated by buy-to-let versus the stockmarket, people often ignore the positive impact of reinvested dividends. It is dividends and the ability to reinvest them and let compounding work for you that makes the difference when investing in equities. 

“It’s also worth noting that potential house price growth is often based on historical trends which are unlikely to be repeated.”

Not only can those with a pension pot invest across a range of asset classes to ensure their risk is spread and the returns are diversified but also there are plenty of tax efficiencies that apply to pensions.

“Pensions are extremely tax efficient and can be passed on to beneficiaries tax-free if you die before age 75. A buy-to-let property, on the other hand, could be subject to inheritance tax,” Mr Selby notes.

Home is where the money is?

Philip Hanley, director and independent financial adviser at Philip James Financial Services, understands why people are drawn to putting all of their money into a house.

“Buying a house as an investment has a major attraction over putting money in the bank or stocks and shares: you can see what you’ve got for you money. We all live in one, so it’s something we understand. It’s tangible; everything else intangible,” he says.

But for him, the cons far outweigh the pros when it comes to purchasing a buy-to-let.

“Income is not tax-efficient (you can’t use Isas or Sipps) and only as reliable as your current tenant. Capital growth can be great, unless you need to sell when it’s not,” he cautions.