At 55-plus, being able to meander past your own investment gives some self-gratification. But how to source such an investment can be daunting.
Auctions offer a transparent and speedy route into property investment for those over 55 who can now draw down up to 25% of their pension pot tax-free. So, what hurdles and pitfalls does the virgin investor need to be looking out for? And how can they make sure they have their eyes wide open, and all angles covered, before they bid?
While the caveat “buyer beware” applies, it is not the want of auctioneers to cajole newcomers into buying something that really isn’t suitable for them. Indeed, most of us are at pains to be open with the information we provide, directing bidders to read all the small print and understand the auction process. Not least, buyers need to be aware that a binding contract is formed once the hammer falls, unless the special conditions say otherwise.
Assuming the novice buyer has digested all of the relevant information, affordability must have a bearing in what may be the biggest individual investment decision he or she will ever make. Not just how much to spend on the property itself, but all the add-on costs.
As a rule of thumb, about 5.75% of the purchase price is usually allocated to cover stamp duty, legal and surveying costs. Perhaps more importantly, as buyers tend to forget this, for an auction purchase they may need to provide for a buyer’s commission and/or administration fee. The prudent buyer will also allow a contingency to cover immediate potential outgoings on purchase, such as an initial shortfall in rent, immediate repairs, insurance and the like.
The pension lump sum can be used to pump-prime a loan, which itself will carry some costs (and possibly penalties on redemption), but a conservative loan can usually double spending power.
Perhaps as important as the size of the budget is what type of property to buy. This is where an auction catalogue can offer a selection of possibilities ranging from what is now a fairly traditional buy-to-let residential investment to a less traditional commercial investment. Typically, this can be more difficult to fund, but with a sizeable pension deposit of, say, 50% of the purchase price, it could make for a very nice investment option.
Every investment has its own warts that need to be identified and accounted for but, provided these risks are picked up and considered, they shouldn’t prevent the novice investor from making a bid.
With leasehold residential investments, for example, the buyer needs to be aware of charges provided for in the lease, usually annual ground rent and service charges, and possibly contributions towards any major building works. A tenant might be expected to be responsible for general rates, water rates and contents insurance, but the landlord generally pays for buildings insurance and, to be on the safe side, might want to take out public liability insurance.
In contrast, for commercial properties let on repairing and insuring terms, the tenant is usually pretty much responsible for all outgoings, including repairs. But if the tenant “disappears” the burden for repairs in particular can fall back on to the landlord, not forgetting rental voids, empty rates and the time and cost of finding a new tenant.
The cost of managing the property also needs to be accounted for, although some investors might want to try to do this themselves.
All of these costs need to come off the bottom line. So, the net return, or “cash” in the investor’s pocket, may well be a few -percentage points less than the gross return quoted, depending on what level of out-goings they need to provide for and what control they have over costs.
In the long term, there may be potential to increase the rent as well as capital growth. But unless the increase in capital value can be harvested through some form of equity release, the benefit won’t be felt until you sell up or, looking on the bright side, you “pop your clogs” and your beneficiaries share the spoils.
Philip Waterfield is a director at Strettons
