Buy to let mortgage
Real estate properties can be let. Therefore, people who already own a home, may chose to acquire another for letting the property. Alternatively, they may invest in commercial properties with the sole purpose of letting them out. Or even agricultural farms that can fetch annual agricultural income. Some people buy fleets of cars and trucks for letting them out.
Advantages of acquiring such buy to let properties
- Rent received on properties increase over a period in tandem with inflation. Therefore, if the rents received were to be adequate today for a months households expenses, 10 years the escalated rent would also be adequate to meet the higher cost of living at that time. There are no fixed interests bearing securities that offer this comfort.
- The real estate properties bought for letting out continue to increase in value, and this equity can be cashed through mortgages and rental discounts from time to time.
- The increase in value of real estate properties bought for letting out is not taxable until and unless the property is sold. Therefore, the net worth of the owner continues to increase without him or her having to pay any taxes.
- The capital gains arising from sale of properties bought for letting may also be rolled over into another real estate asset. Part of such capital gains may be completely exempt from taxes. These are called indexed cost of acquisition. Such indexed cost of acquisition is, in fact revaluation of the asset considering the inflation in the interim period.
- Investment in buy to let properties enables supplementing retirement income
Disadvantages of buy to let properties mortgages
- The tenant may not be very accommodating, and constantly ask for some modification or the other, which may siphon away the rent earned;
- The tenants may not maintain the properties properly, resulting in decrease in net rent earned
- Tenants may refuse to vacate the premises if there is some goodwill or other factor associated with the business of the tenant. In such cases, the owner of the property may even have to pay some funds to the tenant to get the property vacated.
- Normal wear and tear costs also increase with time. These expenses effectively reduced the rent earned
Advantage of buying properties through mortgage for letting
- The installments and interest on buy to let mortgage are deductible against the incomes for tax purposes
- The mortgage loan is repaid over a long tenure. If discounted for inflation, the interest on the mortgage loan is negligible.
- Additional loans are possible with second and third mortgages of the buy and let property
Disadvantages of buying properties through mortgage for letting
- The interest rates are higher when compared to first home purchase loans.
- The sale of property in the interim period may not be possible because of outstanding loan amount. This may force the borrower to take loans at higher interest from other private sources.
- As long as interest rates continue to be bound southwards, buying properties for letting them out is advantageous. However, if the interest rates start climbing, there comes a point beyond which the rentals do not move up very rapidly. This is particularly true for old properties that lack modern amenities. Since rentals do not compare well with what the interest may be or would have been earned on the investment, this can be a major drawback. However, any such interest income is also taxable. Whereas some part of rental income is allowed as deduction under income tax as attributable towards depreciation, or repairs and maintenance.
The residual values of buy to let vehicles may be very little, especially if the vehicle has been used carelessly or new more sophisticated models have come. Such residual values are normally the only profit that a person investing in such vehicles gets. It follows that lower residual values mean lower profits.
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