As a financial adviser, one of the most common enquiries I get from clients is whether they should invest their money into a pension or into property.
My first response is usually ‘Why not both?’ Just like equities or bonds, property can add diversification to a portfolio.
Once we understand a client’s personal circumstances, and whether investing in property is right for them, we can start to talk about what the process will look like and how much it will cost.
The preliminary discussions you need to have with a client are important and should happen at the earliest stage, given the increased complications and increased stamp duty surcharge of 3 per cent.
As advisers, a large part of our role is to provide honest and truthful financial guidance on any decisions our clients are looking at making. This is especially true when we are discussing buy-to-let as an investment opportunity.
Whilst buying a property is essentially the same as it always was, purchasing a property as an investment has, in the past few years, become more complicated. Mortgage interest tax relief that could be claimed has been reduced and the tax returns process has become more complicated. This is leading to more investors seeking support from an accountant or setting themselves up as a limited company to manage their buy to let property.
As a result of these changes, it is important to make sure clients understand that being a landlord is like owning a business and does require commitment.
With that said, there are ways we can provide guidance to put clients in the best position for success. Below are my top three.
Make sure your client has done their research
This is absolutely key. In the digital era, there is an abundance of information everywhere. Clients have the invaluable opportunity to use this data and insight to their advantage.
Whether this is looking at the pros and cons of potential areas, familiarising themselves with the housing market, or gaining a basic view of the tax and legal issues that surround being a landlord, it is vital that they have understood the gravity of the opportunity and have done their homework.
Help them build a power team
As the old adage goes, ‘many hands make light work’. This is no less true for investing in property. The quality of your client’s team often denotes their success, and it is important that a team is compiled of people who understand the lay of the land – no pun intended.
Alongside our role as the adviser, we always advise that our clients seek out an accountant that also specialises in property. There are many tax complexities surrounding property, such as Section 24 of the Finance (no. 2) Act 2015, which means that investors will no longer be able to claim mortgage interest, or any other property finance, as tax deductible.
Instead, rental profit will be taxed with a maximum deduction for finance costs of 20 per cent, the basic tax rate, by 2021. An accountant with a focus on property will be able to help clients navigate the complicated tax landscape in the sector.
In addition, regulatory changes such as the 2016-2017 PRA regulations materially changed the BTL sector, which means lenders now require the interest cover ratio, as well as new treatment on those landlords owning four or more properties.
This in turn gave rise to specialised lenders who could be more generous with their ICR calculation. Advisers should look to those professionals that have experience in these parts of the sector, and knowledge of specialist buy-to-let lenders.
It is also equally important to sound out a good property lawyer. As with tax and financial advice, property-related law is complex and requires a lawyer with the relevant specialism.
Manage your client’s expectations
In the same way that investing in an equity market must be framed as a long-term decision, so too must investment in property be seen as a long-term endeavour. It is vital that you manage the expectations of your client, and make sure that they appreciate being a landlord must be viewed in the same way as they would view running a business – this means not expecting an instant return on investment.
Perhaps there are renovations required to bring the house up to standard, or maybe it will take time for them to find the right type of tenant for the property. As long as your client understands their time frame and tries not to get cold feet, the opportunity is there.
BTL remains a huge opportunity for investors, and whilst it may not be as easy as it once was, for those who are driven and have the focus and the ability to build a good team around them, the rewards from being a landlord are there to be had.
Advisers can be an enormous help to clients looking to diversify their portfolio through the property sector.
Ash Manning, financial adviser, Foster Denovo
