Buy-To-Let… An Out-dated Investment Strategy?

Buy-To-Let… An Out-dated Investment Strategy?
Palau by Julian Cohen. Why?

Whilst buy-to-let isn't allowed in your SIPP, there is a way to profit from residential property that is SIPP acceptable

Now Your SIPP Can Profit From Residential Property

Residential Property Compared To The Stockmarket

Despite some negative opinions in the media, residential property has been a remarkably resilient investment in the last seven years. 

At the peak of the market in October 2007, the average house price in the UK was £186,044.  Seven years later, having been through the most severe economic crisis in a generation, the average house price in the UK was £189,333.  That’s a gain of 1.77%.  It’s not much to write home about, but it is a profit. 

In the same seven year period, the FTSE 100 fell from 6,661.34 to 6,310.30.  That’s a loss of 5.27%.

Buy-to-let

Buy-To-Let Is One Way To Invest In Residential Property

The traditional method of profiting from residential property is buy-to-let.  Acquire a property.  Rent it out to cover the on-going costs and to generate an income.  Hold it for years. Sell it and bank a profit from the growth in the value of the property.

Buy-to-let is tried and tested.  But it’s not always that straightforward.  Gone are the days of believing you can never lose money in property. When you take into account acquisition costs, disposal costs and your tax liabilities, the return you’d have made from buying and selling the average house in the UK over the last seven years would almost certainly have seen you out of pocket. 

In the current climate, generating a worthwhile net income from buy-to-let is very difficult.  You have to cope with continuing demands for repairs and maintenance, insurance premiums and loan repayments, which will rise at some point in the future.  As it’s virtually impossible to keep your property rented 24/7, any tenant gaps can significantly reduce your annual income.  And if you’re not prepared to manage your buy-to-let property yourself, you’re also going to suffer letting agent fees.  It’s no surprise to learn the vast majority of buy-to-let properties struggle to yield even a small net annual income, for all that time, effort and worry.

Although it was considered last year, the Chancellor has ruled out allowing residential property to be held in a pension.  So when it comes to your SIPP, investing in buy-to-let with your pension money is out.

Residential Property Trading: An Alternative To Buy-To-Let

One of the easiest ways to avoid almost all of the pitfalls of buy-to-let is to not hold residential property for the long term.  It’s to trade residential property.

Trading allows for a continuous return of cash, and in the current economic climate, cash is king.  Cash allows you to acquire properties quickly and cheaply, ensuring a decent return on a quick disposal.  The net annualised return from trading a single residential property is usually significantly higher than the rental returns from a buy-to-let property.  And as you have the possibility of repeating the exercise several times a year, you can increase your buying power and your cash balance.

What underpins the trading of residential property, as it does in any trading situation, is paying the right price in the first place.  It follows that if the price is right on entry and you've done sufficient due diligence, the price on exit will generally take care of itself, delivering the margin you require. 

The law of supply and demand ensures that property trading can work successfully and profitably in any market conditions.  There are always people willing or needing to sell and there are always buyers.  Like any other investment strategy, it’s all about understanding the market, undertaking significant research and only investing when the right opportunities present themselves. 

Here’s A Way Your SIPP Can Profit From Residential Property

A SIPP isn’t permitted to directly hold residential property.  But subject to stringent criteria, a SIPP can invest in a fund that trades in residential property. 

Available to SIPPclub members is a secured corporate bond that trades in residential property in the UK.  It’s run by an experienced firm that has traded more than 3,000 properties in recent years. 

In return for your investment, you receive a contractually agreed interest rate on your money, secured against UK residential property.  As the bond is effectively a huge cash fund, it has incredible buying power, reflected in a return to investors which could be as high as 13.25% per year for the next four years, depending on the amount you invest. 

The bond has been accepted by a number of SIPP operators, having passed their due diligence investigations.  In addition to accepting SIPP money, the bond will accept cash investments too.  Full details can be found in the SIPPclub Invest area.  Like everything you’ll see on SIPPclub, this isn’t a recommendation.  After all, it’s your money and your choice, and only you can know if it’s right for you.

There's Always Money To Be Made In Buy-To-Let...

... but it comes at a price.  So if you like the idea of profiting from the trading of UK bricks and mortar, without the hassles of buy-to-let, with someone experienced taking responsibility for delivering your return, then this is well worth a look.  If you prefer, send us a message using our contact form.

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AJ Bell Is Often The Best Value SIPP For Stockmarket Assets

That's our opinion.  Not just because AJ Bell was the first company to offer an online SIPP.  Nor that it's received many prestigious awards.  And not even because the wife of SIPPclub's Founder has an AJ Bell SIPP.  It's because it's one of the most competitive stockmarket SIPPs on the market. 

Over time, charges can wipe out a huge part of your fund.  We like AJ Bell because there are no set-up costs.  If you hold passive funds, which is our preference, or shares, investment trusts, EFTs, gilts or bonds, you pay one small fixed fee no matter how large your fund.  And when you come to draw your benefits either as occasional drawdown or UFPLS payments, there's a small charge for the whole year no matter how many times you access your money (many SIPP and SSAS providers charge more than this for each payment).  However, you should always compare charges in detail, because AJ Bell could be more expensive than other providers, depending on the type of stockmarket assets you hold.

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