Rental properties can be a great way of building a passive income stream, and for many of our clients it is an important element of their retirement planning.
But if you are still working, what should you do with the income that comes from your BTL investment properties?
Use it to over-pay your mortgage
You could consider using the net profits from your rental properties to over-pay your residential or BTL mortgage. Check with your lender to ensure there are no restrictions or penalties for overpaying.
This has the dual benefit of reducing your debt, and when over-paying your BTL mortgage, increasing the future profits you receive.
This will mean that by the time you retire you are receiving a higher income; at the time you need it most.
Save it
You could save those profits in your savings account or Cash ISA.
We recommend that all our clients hold at least three months of committed outgoings in instant-access savings, so if you don’t already have this amount set aside then this should be your first port of call.
With interest rates remaining at historically low levels, many people find the returns on cash to be too small, so you may want to consider whether this is the right thing to do in the long-term.
Invest it
You could use your profits to invest in the stock market.
Stocks & Shares ISAs are generally the most tax-efficient way to invest, as the pot grows tax-free, and there is no tax to pay when you cash it in.
We recommend investing in a professionally managed diversified portfolio, rather than buying individual shares, unless you’re an expert investor.
You need to be aware that investing in the stock market carries risks and does not provide the same level of capital security as deposit account. Investments fluctuate in value, and you may get back less than you invested.
Buy another property
Depending on the level of income you receive, and what other savings you have, you may be able to use the income to save a deposit for another rental property.
You need to factor in the additional stamp duty that applies when you own more than one property, the changes in mortgage tax relief for landlords, and make sure you can afford the upkeep and risks of having more than one rental investment.
Supplement your employed income
You may wish to consider cutting back your hours at work, or take a lower-paid job, by using the rental income to make up the shortfall. Make sure you do your sums, and take tax into account when making your decision.
*The content of this article is for your general information purposes only and does not constitute advice. It does not contain all of the information which an investor may require in order to make an investment decision. Obtain professional advice before making any financial decisions.
Your home maybe repossessed if you do not keep up repayment on your mortgage.
The value of tax benefits described depend on your individual circumstances. Tax rules can change. The Financial Conduct Authority does not regulate Buy to let properties or Tax advice.