THE PERILS OF USING A PENSION FOR BUY TO LET

KEN HOUSTON

It is being widely stated that the recently-introduced pensions freedom will lead to large numbers of new retirees, or those on the cusp of retirement, spending their fund on a ‘buy to let’ investment.

There are two things anyone so minded needs to keep in mind.

One is the fairly obvious consideration that (depending on the size of the pot, of course), taking the proceeds of a pension fund in one go could lead to the drawer paying 40 per cent income tax on a substantial part of the total. Probably the best option is to draw out enough to pay a substantial deposit and secure a mortgage on the remainder.

A consideration which may be less obvious is the effort involved in becoming a landlord for the first time in one’s late fifties or early sixties.

One of the most common initial mistakes by newcomers to the sector is failing to take account of location; in other words, buying a ‘nice’ property in a part of town that is not popular with renters

Should younger landlords make this error they at least have time to recover financially whereas members of the ‘silver generation’ perhaps may not.

But even if you make a good choice in terms of property and location, and the rental income starts flowing in while all the time your property is increasing in value, being a landlord is seldom without hassle. Therefore older first timers really do need to ask themselves if buy to let is something in which they want to get involved at their time in life.

My own limited experience of landlordism will give a taste of what can happen.

Some years ago circumstances required me to rent out a small flat in central Edinburgh. It was not a commercial exercise; the income did not cover all my outlays but I was happy to earn enough to at least service the mortgage.

Yet my biggest problem involved a tenant who might be otherwise described as ‘ideal’ – he was young, had a pleasant disposition, held down a regular job, was an active and committed Christian (so no risk of drunken orgies in the flat) and was prompt with his rental payments.

So everything was hunky dory or so I thought until the night the tenant phoned to tell me that he had slipped in the shower, had grabbed the piping to steady himself, and in doing so pulled the piping and shower-head from the wall, taking scores of tiles with it.

The conversation then went something like this:

Me (after getting over the initial shock): “So, would you like me to arrange the repair or do you wish to do that yourself to get the job done quicker?”

Tenant: “No. I’d like you to arrange it. It’s your responsibility to put things right – and to pay for the work”

Me: “No it’s not. I can’t be responsible for you slipping in the shower. You should have been more careful; perhaps you let the soap fall and that’s the reason you slipped?”

Tenant: “That’s not the point. You should have provided a shower mat; had you done so I would not have slipped.”

Me: “But when you viewed the flat you must have known the shower-room did not have a mat…..and I don’t recall you asking me to install one.”

Tenant: “You surely cannot expect me to take in everything in one viewing.”

Me: “But it’s an extremely small flat…..there wasn’t much to see and not take in.”

And so it went on, with the phone call ending inconclusively and somewhat acrimoniously.

By then I was tempted to hire a couple of heavies to resolve the problem but being a peace-loving, law-abiding citizen the moment soon passed and I consulted my lawyer instead.

In his douce and couthy way the lawyer explained that, yes, in legal terms I was probably right in expecting the tenant to pay for the damage. On the other hand there was no guarantee the court would rule in my favour and did I really want to go through the cost, time and effort, especially as the other party was, in other respects, a model tenant and that this was a one-off incident unlikely to be repeated?

So, on the basis that ‘once you’re in a hole the first thing to do is stop digging’, I took his advice and after a conciliatory call to the tenant we eventually agreed to split the cost of repairs.

However the moral of this tale is that while the cost was unwelcome in itself, the hassle was even worse.

So, yes, by getting property and location right from the off, a buy to let investment could work even for older investors new to the sector. However they should be in good health and, perhaps even more important, have the right mental attitude to see the project through.

Twitter: @PropPRMan

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