Buy-to-let golden rules

That said, there are a range of conflicting views about what will happen when the new regulations come into force. Some argue that the rush for property will boost values and price first-time buyers out of the market. But a poll carried out by the deVere Group raises serious doubts, because the results of its survey suggest that nearly two-thirds of the over 55 age group are simply unaware of the new tax implications governing pension fund release. Around 65 per cent of those surveyed did not realise that only the first 25 per cent withdrawn from a pension fund is tax-free. And if you want to take out more than the 25 per cent that is tax-free, you will pay tax. This is significant because larger sums withdrawn from a pension pot will be charged at the individual's highest marginal tax rate, which in some cases could be as much as 45 per cent.

Whatever the case, becoming a landlord certainly seems to be attracting interest. A recent survey by Platinum Property Partners revealed that around one-third of those approaching retirement are considering the idea of buying a buy-to-let property. And while the shortage of rental property continues, the idea appears to have its merits.

A costly business

It seems likely, however, that a lot of 'silver landlords' will fall foul of the many pitfalls that go with the rental market. Buy-to-let is now a regulated sector, and there are many legal requirements imposed on a landlord that even the most experienced can sometimes find daunting. Non-regulated responsibilities can also eat away at rental income. A landlord is responsible for the maintenance and upkeep of a furnished rented property. This can include heating systems, washing machines, drains, guttering and a wealth of other potentially expensive items. Rental income is also taxable.

Some landlords take a different approach by employing the services of a letting agent. This takes care of most of the administration and maintenance headaches, but the agent will also take a fee for the work. Certain parts of the country are also involved in trials whereby landlords face a fine of up to £3,000 if they fail to determine whether their tenants legally have the right to live in the UK before granting a tenancy. If these trials are successful, they could be rolled out across the rest of the country later this year. And with over 1.5m people living in private rented housing without a passport, this could introduce significant difficulties for an aspiring landlord.

Local issues

You also have to decide where you wish to locate your property. The ideal location would be somewhere close to where you already live, but this is not always possible, for a number of reasons. If you own a property in or around London, for example, buying something just around the corner could be prohibitively expensive. Sure, you can also command a high rent, but the yield is still likely to be lower than if you bought a cheaper property in another part of the country.

There are a range of options. Most aspiring landlords will want to keep on living where they are and buy another property. But there are other avenues open. Neil Woodhead of Ready Rentals, an online support service for private landlords, cited the case of one client in Scotland who sold his rental property - a modern flat, bought originally for £110,000 - for £160,000, and bought two single-bedroom flats for £28,000 each. The point here is that the monthly £550 rent on the modern flat grew to £730 for the two smaller flats combined. The alternative considered was to sell the original flat and invest in a pension fund, but the return was significantly less attractive. This kind of transaction may be possible in some parts of Scotland, but it wouldn't work in Guildford. Other options include selling your large house in the London suburbs and buying two or three small properties elsewhere - one to live in and two for renting out.

Funding solutions

Using some of your own capital in your house can increase your options and reduce the need to top up any house purchase with a mortgage. Where this is not possible, the seed capital can come from your pension. But if you want to release more than a quarter, remember, you are liable for income tax, which will blow a big hole in your accumulated funds. This option can be exercised by anyone over the age of 55. But just taking the tax-free element is unlikely to free up sufficient capital. On a £400,000 pension pot, for example, which is extremely large, you would only be able to draw down £100,000; a useful sum outside the property hotspots, but not enough to buy much in the south-east. In Liverpool, you can buy a luxury apartment from around £65,000. But even then it's worth remembering that the average size of retirees' pension pots across the UK is pretty modest at just over £61,000. Even in the most affluent London area, the average size is still just £73,000.

Get your options in line: Selling your large house in the London suburbs and buying two or three small properties elsewhere is an alternative option.

One alternative is to raise funds through a buy-to-let mortgage. Up until recently, this has been a virtual non-starter for someone aged 65, but lenders are already having second thoughts about whether to revise their lending policies. At the Mortgage Works, part of the Nationwide Building Society, pensioners under the age of 70 can apply for a mortgage with a repayment period of anything up to 35 years. The mortgage is secured on the asset, though. If the mortgagee were to die, the beneficiaries might consider taking out a fresh mortgage or repaying the loan with other funds. Otherwise, the asset would have to be sold to repay the mortgage. It's also worth remembering that there is little flexibility on the repayment terms. A void created by a gap in tenants occupying the property would leave the owner/landlord with a break in rental income, but with the obligation to maintain mortgage repayments.

Using equity release as a source of top-up funds is altogether more viable. But those funds will have to come from existing properties or other accumulated funds. Property values are still rising, albeit more slowly. Even so, the sector of the population over 55 is currently sitting on property worth over £2,100bn. Those with larger-than-average pension pots may well decide to employ their funds in several different ways, including drawdown for investment and annuities. However, it might make sense to take a step back ahead of the April changes because annuity providers are still working on how to pull funds back into the sector, and it may well be that we will see a flurry of hybrid-style products that combine investment drawdown with annuity elements.

It's all about the maths

It's important to get the arithmetic right. For most aspiring landlords the numbers simply won't stack up. For example, take a £150,000 flat within an hour of London. Rates vary, but you can reckon on charging around £650 per month in rent. That works out at a yield of 5.2 per cent. Assuming property values are not at the top of the cycle, there will be an element of capital appreciation in this too, although this will not be crystallised unless the property is sold. If you took out a £75,000 mortgage at 5 per cent, this will cost around £310 per month for an interest-only mortgage, or £3,720 a year. That's a net £4,080 return for your £75,000, or 5.4 per cent on the £75,000 invested. Either way the return is before income tax, maintenance costs, legal fees and agency fees.

But this is a guide only. You could find a cheaper property, perhaps one for £120,000 that needs refurbishment. This will add value and push up the sort of rent that you can charge. But be careful to assess the initial costs. Remember, too, that in a downturn, capital values and rental income could both fall. This is bearable for many long-term landlords, but for those who are more highly geared, some lenders may become anxious if rental income falls close to the cost of servicing the mortgage.

And while there is no sign of an increase in interest rates, they will at some point head higher. When they do, it will be in response to strong economic growth, which could advance the opportunity to increase rental rates. But these might not be enough to cover the increased costs of servicing a mortgage. In the example given, an increase in buy-to-let mortgage rates to say 10 per cent would eat up a large portion of the rental income.

The returns could be a lot better if you buy in a regional city with ready-made demand, from a university for example. Here there is a chance to buy a multi-bedroom property and fill it with students. Several snags spring to mind, though, apart from the obvious risk of damage and misuse. Students go home in their long holidays, so your rental income dries up.

Joining the small army of private landlords now may have its attractions provided you are very selective about where you buy. On a broad basis, this suggests that those in the more affluent south of the country, who are likely to have bigger pension pots and a more expensive house, are best placed to make a go of becoming a landlord by investing outside the affluent south-east, a business option that many may not find appealing.

Invest in success: The returns could be a lot better if you buy in a regional city with ready-made demand, from a university for example

Buy-to-let blues

So why does anyone bother with buy-to-let? For the answer you have to go back to when house prices were not so high. The arithmetic worked much better then, because in the recent recovery the rise in capital values has far outweighed the increase in rents - giving so-called yield compression. Furthermore, those with a portfolio of properties bought when values were depressed are now sitting on capital gains that can be crystallised and used as a deposit to increase gearing, and subsequently rental income. Essentially, building up a profitable buy-to-let portfolio takes time, more time perhaps than many pensioners have at their disposal.

There are also doubts about how ready the pension providers are for the changes. Nigel Green, chief executive of financial consultancy group deVere, is pretty scathing in his criticism of the proposed changes, arguing that the introduction of new pension freedoms is "alarmingly chaotic". "This chaos is evidenced by the fact that only a small fraction of pension providers have confirmed that they will be in a position to offer unlimited access in April. It is clear that many pension companies have existing systems that perhaps will struggle to cope with adapting to the new rules," he added. On top of this, even if the required systems are in place, pension providers may be tempted to drag their feet because allowing lump sum withdrawals means a loss of business. There are also doubts that government guidance service Pension Wise will be up to the task of handling what is calculated to be 300,000 initial enquiries. Mr Green added: "Everyone has different circumstances and financial needs, wants and dreams and these cannot be appropriately addressed within non-specific guidance in a 30-minute chat. This is why tailor-made, independent financial advice is vital - especially during these times of unprecedented change in the pensions landscape."

It's also worth reflecting on the financial pain meted out to a large number of one-property landlords during the financial crash seven years ago. You can withdraw from liquid investments such as equities with some speed. That's not the case with a house, especially when the tenant has left and the value of the house is falling. And given the relatively small amount of tax-free capital that could be crystallised from the vast majority of pension pots, becoming a landlord is probably not really an option for the majority, unless an accumulated pension is significantly more than the national average, or unless other funds are used as well.

Finally, if in doubt, do nothing until the scrum dies away after April. There will be offers galore tempting you to put your whole pension fund into various property schemes. Some of these will look attractive, but many will ultimately work out to be more expensive than the glossy brochures suggest.

The Reit path

If the path to becoming a landlord is too arduous, there is an alternative, albeit one that carries more risk, and that is to invest some of your pension fund in a publicly quoted property company. Specifically, real-estate investment trusts (Reits) generate revenue from the rent raised from a property portfolio, or, in the case of a mortgage Reit, from the interest generated on mortgage loans. For shareholders, for that is what you would be if you bought the shares, the advantages include a significantly higher dividend yield. To achieve Reit status, a company is required to distribute at least 90 per cent of their taxable income for each accounting period back to investors. The advantage for the property company is that it pays no corporation or capital gains on the profits made from property investment. The downside is that Reits are more volatile than direct property investments, and behave more in line with equities. In the longer term, however, their performance is more closely correlated with property than equities.

One high-yielding example is NewRiver Retail (NRR), which specialises in buying and refurbishing bombed-out regional property assets, and was set up in 2009 by real-estate veteran David Lockhart. By refurbishing properties, NewRiver is able to drive rents higher, and through a string of fundraising activities the group has more than tripled its market capitalisation. To minimise development risk, these ventures are only conducted on a pre-let basis. A typical example is the sale and leaseback to brewer Marston's of 202 of its pubs. Marston's will continue to pay rent, while some of the properties will be converted into convenience stores through an agreement with the Co-operative Group. Net operating income has risen from just £4m in 2012 to £23.1m last year, and is forecast to reach £41m by 2016. The dividend payout equates to a yield of around 5.5 per cent, and has the added attraction of being paid quarterly.

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Case study: Lessons from a successful landlord