B2L retirement investors expect strong returns

Ryan Fowler

June 23, 2014

PPP survey of 500 BTL investors showed that on average they believe the income from their property investments will make up more than half (56%) of their overall annual retirement income.

This is expected to be £35,600, with £19,785 coming from BTL and £15,815 from other streams including pensions and other investments.

The average annual retirement income across the UK from all investments is £19,300 according to the ONS.

This means that BTL investors expect to enjoy annual retirement income that is nearly double the national average.

According to the research, securing retirement income was the main priority for more than half of BTL investors (50.4%).

And the intention of investors who are rapidly approaching retirement is to increase the income they receive from BTL property before they give up work.

The average annual income from the BTL investments of landlords aged 40 to 55+ currently stands at £17,500. This means they intend to increase their income by 13% before they retire in order to achieve an annual income of £19,785 from BTL.

Tony Bennett, managing director of Platinum Property Partners, said: “Anyone approaching retirement will be looking to maximise the income they are set to receive from all of their investments and buy-to-let investors are no different.

“But increasing income from buy-to-let property is not as straightforward as waiting until you reach retirement age and simply snapping up more properties.

“Planning your investments well in advance is the best approach to ensure you secure a reliable income. This has been put into even sharper focus following the recent government announcement of changes to pensions and annuities and the interest this has piqued among investors.”

Separate research from PPP found that over a third (35%) of middle income adults approaching retirement, who are not already BTL investors, are either actively considering BTL or would consider it as an investment option in the future.

For those who said they would consider BTL, the main reason (45%) was the belief that it offers a better investment opportunity than conventional retirement savings such as pensions.

Two fifths (40%) of those considering BTL said the reason was because property prices are rising and they want to capitalise on that growth.

More than a third (36%) are considering it because they want to generate an income as well as achieve capital growth. However, two fifths (41%) are planning to sell the properties when they reach retirement.

Bennett added: “There has been much made of the changes to pensions and annuities announced earlier this year and this may well have increased the number of people considering buy-to-let investment as they approach retirement.

“But the fact that so many plan to sell their properties at the very time that they could benefit from the income they generate, suggests they are unaware of how to maximise their investment.

“Healthy income can be achieved in retirement through property investment, but it needs to be researched, planned and approached in a business-like manner.

“Waiting until you’re at the point of giving up work is not the best option. People should always research and seek advice whatever type of investment they are considering, and this is particularly true for BTL investors – especially as our research shows there is a worrying lack of knowledge amongst existing landlords.”

The traditional measure of BTL success – gross yield – is a calculation of the annual rent as a percentage of the total value of the property – a figure which often lacks consistency.

Some investors might add refurbishment costs to the value of the property, while some quote the gross yield on the purchase price, and others update the value based on its current market worth.

Furthermore, gross yield only considers the income from rent and excludes the costs of running the property such as voids, arrears, maintenance and furnishings.

Bennett said: “The most useful measure of return is to look at returns on landlord’s funds or ‘return on capital employed’.

“This is the net annual rent – net of all operating costs – divided by the actual capital invested in the property. Using this method of assessing the financial performance of an investment you are more likely to make your capital work and produce a good annual income and benefit from longer term capital value growth in the property.

”Focussing on income rather than yield will also allow investors to better consider their investment choices. For example, in the right locations, Houses of Multiple Occupancy (HMOs) will provide higher rates of income than standard buy-to-let investments.

“And higher income will give investors better protection from market shocks such as interest rate rises.

“More complex buy-to-let investments can certainly offer higher income opportunities, but they are also much riskier investments if not approached in the right way with support in the appropriate areas.

“With that in mind we recommend anyone considering buy-to-let to assess their options and seek expert advice in order to make their investments work for them.”

Despite the large proportion of adults considering BTL as a retirement investment, the vast majority (70%) admit to having no previous experience of investing in the sector.

In addition, only 37% of those who are considering BTL are confident of generating successful returns.

This inexperience is demonstrated in the apparent disconnect between how these future retirees would approach BTL investment and what they believe to be a healthy return on investment.

When asked what type of property they would target, the highest proportion (36%) of potential BTL investors identified two bed flats. However, on average, potential investors believe an attractive gross yield on a BTL investment would be 8.2%, a figure some way above the average yield for two bed flats across the UK which currently stands at 6.7%.

Bennett concluded: “Having a solid investment plan is key. An integral part of this must be to understand the market you’re buying in, ensuring you purchase the right property, in the right location and are targeting the right customer base.

“For example, in the right locations, Houses of Multiple Occupancy (HMOs) will provide higher rates of income than standard buy-to-let investments.

“And higher income will give investors better protection from market shocks such as interest rate rises. With that in mind we recommend anyone considering buy-to-let assesses their options and seeks expert advice in order to make their investments work for them.”

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