Low interest rates are generating high yields for buy to let properties – and giving investors a good choice to make over what to do with the extra money.
Private landlords have several options – none are right or wrong, but the choices should link in with an overall property business strategy.
The first decision is what type of mortgage to choose – interest only or repayment?
The traditional choice for a landlord is an interest-only mortgage because interest payments are a tax deductible business expense and often make up the largest deduction to minimise income tax for a property investor.
Because the landlord only repays interest on the loan, the monthly payments are low.
The professional investors thinking behind taking an interest only mortgage is the option gives the landlord choices over what to do with any rental profits once the mortgage is paid – and that’s where the options come in depending on investment strategy.
Some landlords just want a single or may be two investment properties with a view to generating extra cash for their retirement, either from rents or investing any capital raised from selling.
Diverting any extra rental profits in to paying down the mortgage earlier is definitely worth considering in this scenario reduce or remove the mortgages to increase cash for spending in retirement.
Other landlords see property as their full time business and want to expand their portfolios to increase their profits and rental income.
Putting the extra cash in to deposits to buy extra properties is the preferred option under this strategy.
A popular question from landlords is shall I pay off my buy to let loan or home loan first?
The answer is always the home loan, as the buy to let loan receives tax relief and the home loan does not.
Another option is improving buy to let properties. Spending on enhancing or extending the property should increase the rent and creates a pound-for-pound set off against capital gains tax on the eventual disposal of the property.
Improvements are additions rather than replacements – so repairing the roof or changing a like-for-like kitchen don’t count. A loft conversion, new garage or extensions are typical improvements.
Of course, you can always keep the money or go on a spending spree for that special car or holiday.
