How Dodgy Ways of Buying Property Impacts First Home Buyers and Investors

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George Osborne recently changed mortgage interest relief on rental income and many buy-to-let investors have been up and arms about the announcement.

One acquaintance of mine who’s been running buy-to-let properties for over 10 years decried this move. He says that property investors are being discriminated against other businesses, because even though they pay the same amount of agency and utility costs with other businesses, they can’t claim the same benefits that these business owners can enjoy.

I too am an owner of some buy-to-let properties, so I can sympathise with his statement.

However, my friend forgets that running a buy-to-let property isn’t in the same category as other businesses. Unlike other businesses, whenever an investor buys a house and converts it as rental property, an aspiring home buyer loses his shot of buying a house for his or her family.

Hence, it has a direct impact on the residential market as a whole and the government has a right to regulate industry practices in order to level the playing field for everyone.

Again, I am a property investor. I own buy-to-let properties and have been operating them for many years.

I am not going against the entire industry I belong to, but I am advocating against this growing practice of acquiring an unnecessary number of mortgages in order to grow property portfolio.

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When projecting profits, it’s important to consider the effects of taxes.

Let’s say Investor A has one house for rent and has plans of expanding his property portfolio. He wants buy an old house near the city and convert it as an HMO. Investor A doesn’t have the cash to buy the old house, so he takes out equity from his existing property and uses it to secure another mortgage for the house he wants to buy.

This is a very dangerous practice. On paper, Investor A has grown the number of properties under his belt and it looks like he’s going to cash in. However, when capital gains tax comes in, the truth is revealed to Investor A that he isn’t really making any money out of the process.

If he decides to sell, he’d have to give up a large proportion of the profit to the taxman. From there things would only turn for the worse, because he’ll also have to give up the remaining equity to his lenders for his unpaid mortgages.

Many claim that amateur landlords are more likely to fall into this cycle. However, this practice has been used by property investors for many years.

While there are many landlords who stick to sensible policies on debt, there are a minority group of property investors who are wreaking havoc in the property market with these potentially dangerous practices.

I am writing this post to remind all property investors that easy profit isn’t the end all and be all of property investing. It’s better to build a steady business model that can give you rental yields for decades, rather than double your portfolio in as instant and have it all vanish with just a flick of a switch.

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