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Thursday, March 3, 2016

Inheritance - Bonds or Northampton Buy to Let?

I had an interesting email from someone in Northampton a few weeks ago, that I want to share with you (don’t worry I asked his permission to share this with you all). In a nutshell, the gentleman lives in Abington, he is in his mid 60’s and still working. He has a decent pension, so that when he does retire in a couple of years’ time, it will give him a comfortable life. He had recently inherited £165,000 from an elderly aunt. One option he told me was put it into a savings account. The best he could get was a 2 year bond with the Post Office, which paid 1.9%, meaning he would get £3,135 in interest a year.  One of his other options was to buy a property in Northampton to rent out and wanted to know my thoughts on what he should buy, but he had concerns as he didn’t want to take a mortgage out at his time of life he was also worried about all the tax changes he had read about in the papers for landlords. 

Notwithstanding the war on Northampton landlords being waged by George Osborne, the attraction of bricks and mortar endures for many. As our man is a cash buyer, he would not have to deal with the intricate cut to mortgage interest tax relief that will diminish, or even eradicate, the profits of many Northampton landlords. It’s true he would face the extra 3% in stampduty to buy a second property, but with some good negotiation techniques, that could soon be mitigated.

I told him that buying a Northampton buy to let property is all about the total return on investment. True, he could put the money in the Post Office bond and receive his interest of £3,135 a year, or as he rightly suggested, invest in property in Northampton. The average yield (yield being the equivalent of the interest rate on the property) at the moment in Northampton is 4.08% per annum, meaning our potential F.T.L (First Time Landlord), should be able to, depending on what he bought in the town, earn before costs £6,732 a year. (However, I told him there are plenty of landlords in Northampton earning half as much again (if not more), if he was willing to consider more specialist investment types of properties – again, if you want to know where – look at my blog or drop me an email).

The bottom line is this, the success of investing in Northampton buy to let property versus a savings account with the Post Office (or whatever Bank or Building Society is offering the best rate) will depend on the performance of those assets. Unlike a savings accounts with property the capital you invested can also go up (and yes, it can go down as well – more of that in second). Property values in Northampton have risen in the last twelve months by 5.7%, meaning that if our chap had bought a year ago, not only would he have received the £6,732 in rent, but also seen an uplift of £9,405 …meaning his overall return for the year would have been £16,137 (not bad when compared to the Post Office!).

..  but the doom mongers amongst you will say, property values can go down, as they did in 2008, and in 1988 and 1979. Yes, but after 1979, prices had bounced back to their ’79 levels by 1984 and went on to grow an additional 58% in the following four years. Then again, they dropped 1988 and did take 13 years to reach back to those ’88 figures, but the following six years (between 2001 and 2007) they then increased by an additional 66%. Now, according to the Land Registry, average property values in Northamptonshire currently stand 1.13% below the January 2008 level, and anicdotal evidence suggests that in the nicer parts of Northampton, we are well above these sorts of levels. Therefore, all this talk of property crashes are unfounded.

… and what would that £165,000 get you in Northampton? A decent 3 bed semi in the Headlands or Semilong area or a lovely 3 bed terraced in Abington .. in fact, the world is your oyster. But which Oyster?

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