Bob Young is managing director of CHL Mortgages
A flurry of recent positive headlines about the buy-to-let sector in the mainstream press might well have resulted in brokers seeing an increase in potential clients over the past few weeks.
Certainly, given that in the past the buy-to-let market has often been labelled as something akin to the root of all evil then it’s somewhat surprising to see a more positive spin placed on the investment opportunity and the income rewards that can come via investing in property.
A smattering of headlines such as ‘Buy-to-let replaced my salary in four years’ or ‘The towns that offer the best buy-to-let returns’ or ‘£1250bn and rising; how buy-to-let is overtaking pensions’ may well have pricked the interest of a number of individuals who might be looking at (quite literally) a home for their hard-earned cash and brokers may well see an upturn in interested novice landlords looking to take their first buy-to-let steps.
New clients always present an exciting opportunity for advisers and there is a lot to be said for helping an individual purchase their investment property.
However, what should also be at the front of the client’s mind is not just the excitement of the entry into the marketplace but also how they might intend to exit property investing at some point in the future.
Many might think it is far too early to be thinking about what to do with a portfolio of properties when the individual concerned hasn’t even got one under their belt but in my opinion it’s never too early to have this conversation because it can help clarify exactly why the client wants to get involved in the first place.
I am the first to admit that as time moves on the circumstances of those involved are likely to change however there is nothing wrong with the client setting out both immediate and medium-term goals, as well as keeping one eye firmly on the end game. Indeed, it might be of benefit for the adviser to explore exactly what the client is looking to achieve – is it, as the headline puts it, to invest with a view to replacing a salary within a relatively short space of time? For example, does the client want to (as quickly as possible) become a professional landlord perhaps giving up their job to concentrate solely on their properties? Or are they less concerned with maximising their rental income and instead see their properties perhaps more as a pension substitute – perhaps their focus is less on rental yield now but more on capital growth over a far longer timeframe?
Helping the client understand exactly why they’re investing in property should help clarify an ongoing strategy and flag potential problems that will need to be crossed at some point in the future.
Recent research by BM Solutions revealed that this forward-thinking/exit strategy planning is not something many landlords have in place – indeed one in three landlords were said to have no exit strategy or a financial or business plan. Even at its most basic landlords should always be looking ahead at, for example, increases to rates because this will clearly impact on their ability to pay the mortgage or, further ahead, help determine what the strategy is for paying off the capital at the end of the mortgage term.
Longer-term issues such as these obviously come with some serious potential tax implications for clients with both capital gains and inheritance tax coming into play so it’s important landlords always keep one eye on what’s potentially coming over the horizon and how they might be able to exit without being hit by overly burdensome tax bills.
Advisers who have ongoing relationships should be in the best position to deliver recommendations over the years and to steer clients depending on what they want to get out of their investment and the direction they wish to take.
To that end highlighting both the benefits and the pitfalls to clients at the start of the relationship should help ensure they do not lead themselves down a buy-to-let cul-de-sac.