Investing in rental property. Why I hate the idea.
Investing in rental property. Easy money, right? Put down a deposit. Get someone else to pay off your mortgage. Enjoy a steady income of effortless income every month. That’s even before you think about the returns from the property rising in value.
That’s been the narrative for years. While the dream may have been tarnished in recent times (and we certainly don’t see as many prime time shows about investing in rental property any more) it’s still there. A lot of my friends still aspire to this – although, as it happens, not many of them have actually taken the plunge.
I’m not immune to that dream. Why shouldn’t I have me a thick slice of that easy rental investment goodness?
I’m thinking about this as I’m holding some cash (or near cash). That was always going to be a holding pattern until I decided what I was going to do with it. It’s main advantage for me was that it was entirely safe. The downside is that the returns suck (I think they’re something like 1% at the moment).
Now that I have a bit of time I’m thinking about what to do with it. Most of my money is stocks and bonds so diversification is good right. That’s why I looked into investing in rental property.
This post is about why I decided that investing in rental property wasn’t for me.
The business case of investing in rental property didn’t add up
If you’re going to invest in rental property, or indeed anything at all, then you need to have a business case. For me in this case that would be to be able to answer the question “if I invest £x today than what will be the net cash inflow over time, and what is the annual percentage return?”
The minimum benchmark that I would be looking at would be the alternative of putting the money into an index tracker.
When I ran the numbers they didn’t stack up for me. What I was reading about the changes in the UK rules seemed to suggest that my mortgage interest tax relief would soon be limited. In that case, after all costs the net returns didn’t work for me when I looked at the additional effort and risk. In fact I struggled to see how I would break even in a lot of cases.
Some people would argue that when you run a business case you should look at the core business case first and then the debt/equity question of how you finance that is secondary. To be clear it is, of course, entirely possible to invest in rental property without borrowing. There are lots of people who will own their rental properties outright. I’m not in that position though. I have nowhere near the cash I would need to buy a rental property outright. So, for me, the financing question is front and centre.
Also, I really don’t like debt. I understand that it can have its place but I don’t like it. That means that if I’m going to take on debt then the premium that I add for taking on that borrowing risk is going to be higher than some other people. That makes it even harder for a property business case to work for me.
Buy one of these, rent it out, what could go wrong?
I’m not up for speculating on house price changes
“Ah”, some of you will be saying, “What you’ve forgotten is the fact that investing in rental property is investing in an asset. It’s not about the cashflow the asset itself is going up.
“Think of it like shares, your total return is your dividend PLUS your share price increase.
“You wouldn’t buy most shares if all you expected was the dividend income. Think of investing in rental properties the same way. Rental income plus house price appreciation.”
I have a lot of sympathy with this view. Rising house prices is the thing that has helped make a lot of people doing this rich. But I can’t get past the feeling that investing in rental property on that basis is just speculation. My approach to investing is almost entirely to buy global trackers. Yes that’s still speculation but it’s diversified and I’m speculating that the world will have economic growth over the coming decades. I’m comfortable with that. What I’m not comfortable with is speculating on whether the value of one or two properties will go up or not.
Which leads to the question of why not invest in a property fund instead.
Investing in rental property is just investing in another asset class
So one way to get away from all of the hassle of managing a property, and to diversify the risk away from one property is to buy into a property fund. The argument would be that I would get almost all of the benefits but significantly reduce my risk. As a bonus it would also likely be easier for me to get my money back out so it could address a concern about liquidity.
Now this also has a lot of appeal for me. This is much more my comfort zone. I can just jump onto my online broker to look through a few of my options. Click a few buttons and I’m done. Sit back and wait for that lovely, lovely money to roll in.
…except that goes against my investing philosophy. As I’ve just said, I’m all in on the logic of global trackers. That’s what makes sense for me. Why would I choose to go heavily into one asset class? Why would I choose this class rather than any other. I’ve heard some people argue that property is essential to living so it is better than other classes. I’m not clear why investing in a property is better in that regard than water, energy, food etc.
So, for me, property investment funds don’t work either.
I’m already overweight in my exposure to property
I said up front that the reason that I was looking at investing in rental property was that I wanted to diversify away from stocks and bonds. The thing is, when I thought about it I realised that I was already heavily exposed to property. I own my house. It’s worth more than anything else that I own. Importantly it’s still worth more than my pension and other market investments.
I’m not unusual in that I don’t think. If you’re ‘lucky’ enough to be a home owner, then the chances are that a lot of your wealth will be tied up in bricks and mortar. Of course, not enough people then put money into other assets like their pension or ISAs as well, but that’s a different point.
What that meant for me was that I realised that if I invested in rental property I would be increasing my exposure to property as a whole. That didn’t feel like diversification to me.
Do I really want all of my property eggs in one British basket
Following on from this I realised that the problem was even worse than this. If I invested in rental property I would be increasing my exposure to just one very small part of the UK property market. Specifically to the house or flat that I bought. Yes, if the local school suddenly got an outstanding rating, or Waitrose decided to open a branch down the road then the value of the property could skyrocket. But equally if someone decided to build a 24 hour carpark with a nightclub in the basement opposite then that could be rather painful.
I know that some people build investment portfolios of rental properties and many do very well. I can see how that would mitigate the risk from one property, but that’s not me. I’m not looking to build a property empire. That, again, starts to look like a job that I would enjoy less than the job that I do now.
Literal eggs in a basket. Amazing. I am the king of metaphor. “Look upon my works ye mighty and despair”
I don’t want to be a landlord
I’ve gone through some of my “head” reasons for why i isn’t for me, but if I’m honest with myself the single biggest reason I don’t want to invest in rental property is emotional. I don’t want to be a landlord.
Running rental properties is a business. Being a landlord is a job. You can dress those things up however you like but they’re true. It may be that it doesn’t take you a lot of time, but that doesn’t change the fact that it still takes work. And I’m all about being idle.
This was the biggest, intractable issue that I found myself up against. No matter how I tried to finagle it this is not just a buy and forget investment it take work.
Even if you outsource a lot you will still have to manage the contractors. Say you decide that you have to repaint the hallway. You don’t want to do it yourself so you decide to get someone to do it. Here’s an, incomplete list of things that you need to do: hire the painter and negotiate a price, decide on the colour; agree when they will do it; make sure that your tenant is happy with that time, make sure someone will let them in; check the work; pay the painter etc. That’s quite a lot of effort for a job that you’ve outsourced.
It may be that you’re paying someone to manage the property for you. That’s fine. But it does rather make my point. The more of the job of being a landlord you pay someone else to do, the lower your returns. And you still have to manage the property manager. It’s the same as buying a shop and hiring a shop manager to run it. Totally valid approach but Quis custodiet ipsos custodes?
But you can’t outsource everything about being a landlord
Even then, the thing about running a business is that you can only outsource so far. Eventually you have to make business decisions about what to do. When do you replace the kitchen? Do you raise the rent this year and risk losing a good tenant? Do you take the tenant with less than stellar references because you’ve had a void of a couple of months?
You get the idea.
Those decisions come with consequences, even doing nothing. At best the consequences will just affect the level of cashflow from your investment. At worst, say you don’t make sure the roof is sound, that could lead to damage to people and property.
The thing about all that is that if I start a business I’ve got a lot of ideas that I would find much more interesting. Heck, even the retirement cliché of opening an independent bookstore or a coffee shop sounds like more fun to me.
I’ve also already got a job. This would be another job, it would also be a job that would be inflexible. If a pipe bursts it’s not as if you can wait until the weekend to deal with it. I don’t want another job, particularly one that seems like it only comes with grief and no upside besides the money (although money is a decent upside to be fair…).
Conclusion
It’s probably clear to all of you but investing in rental property is a ‘No’ me. I can see the appeal, but there’s no such thing as effort-, and risk-, free money. Is it possible to make good money from investing in rental property? Yes it is. But from where I sit, to do that means treating it like a job. And that’s not a job I want.
To be clear, I’m not giving out advice here. I’m not trying to tell you what to do. This is about the conclusions that I came to. It comes down to my personal balance of risk vs reward, how actively I want to engage with my investments, the balance I want in my portfolio and my life. All of those things are individual.
So I’ve concluded that investing in rental property isn’t for me. I think I’m going to stick with my index trackers for the moment. Having said which I’m also starting to get interested in the idea of P2P investing…but that’s for another time!
Thoughts
What am I missing here?
Do you invest in rental property? What was your thinking?
Am I overplaying the downside of investing in rental property and underplaying the upside?
26 Comments
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we’re on the same page as you with this one. we don’t want to be landlords. the only way i would consider it was if we were younger and could afford a multiplex where we lived in one unit of 4 or 5. i would want to be on site i think. i also believe it would take it personally if a tenant damaged my property.
we’ll find other ways to make money too.
Yes that whole multi-unit thing would have worked very well for me when I was younger but not now. That whole thing about taking damage personally is why we don’t put our house up on AirBnB. We could do quite well from it where we live but just the thought of what someone might do to our place means it’s a big fat no from us.
I like the phrase ‘near cash’. It’s perfect, I am going to start using it.
Glad you like it! I was thinking of things like instant or short notice saving accounts and Premium Bonds. The sort of thing where you can get a bit of a return but not really even keeping up with inflation – but with the benefit of being risk free and being able to get at it very quickly.
Thinking about it a bit more, who actually keeps cash any more anyway?
I’ve been through the same process as you but to be honest the more I look the less attractive it is. If your still sold on the exposure to UK property there are plenty of listed companies that can give you that exposure while eliminating almost all of the downsides you have highlighted:
No Personal Debt
No time spent managing or worrying
Good diversification both in types of property and georaphical split
No Tax inside a ISA/SIPP and outside you still have a dividend allowance (£2000 pa)
No Issues with selling up and realising your investment
Scaleable
That is what I chose to do and so far it’s working out well, I can’t really see the case for personal ownership at all. I’m avoiding anything with heavy exposure to retail or office space, I have both of these at the moment and plan to hold them long term:
Primary Health Properies
Grainger
of Course DYOR.
Thanks Rich. UK REITS are the things that almost attracted me. The thing that I came to with that though was that firstly the returns for me seemed to just be OK for the extra risk when you add in the extra layers of bureaucracy taking a cut and secondly I didn’t see the case for going overweight in property in my portfolio.
As you say though this is very much a personal decision and everyone should do their own research to work out what’s right for them!
I see that property can some times get a bad rap or a good one depending on who you talk to. I have a buy to let company that has one house currently but will probably be getting more. The reason I went into it was because of the returns I could generate. I currently get 16% gross and around 12% net after various expenses. I did about 14 hours work on the company last year (mainly company accounts) and it looks like I will be doing the same this year, or a little more if we buy another house. It’s also a safe investment for me as we have had 100% occupancy rates and will have for the next 18 months at least. We have never had any damage apart from the usual wear and tear. If I managed this property myself it would be enough money to live a frugal FIRE. As it stands reinvesting the profits will allow me to get to a fatFIRE level in a few years which is much quicker than I could do it with the 4% rule.
Run correctly, property can be a very quick way to FIRE. Run incorrectly you could bankrupt yourself and all your friends. Then again, thats the same with every type of investment.
Apart from everything else mentioned I like property because I can directly impact the amount of rent we get by doing certain improvements every so often. I can’t do that with any shares I hold.
Wow. Those are great numbers! I guess they look even better when you look at it on an hourly basis. They are the sorts of numbers that got me interested in the first place.
You make an important point as well. Like every investment whether it’s right for an individual will be related to their risk-reward appetite.
I agree that there are things that a property owner can do to impact their return. This was my point about it basically meaning running a small business. It looks like you have taken that approach and it’s working out brilliantly…I guess I don’t trust in my ability to do the same.
I’m guessing the property in question is an hmo or you don’t live in the UK. There is no way you’re getting 14% on a standard btl
Being a landlord has been more work than I thought it would be, but it has really jump started our pace to FI. Once we got into it we have actually started to like it. I even wrote a book over the first four years of our journey. It’s like a diary…the good, bad, and ugly.
It’s not for everyone, I get that. Once we got started it’s actually not as bad as it seems.
DJ
The way that I wrote this post makes it sound a bit like I think being a landlord would be awful, that wasn’t what I meant. It’s more that I have other things that I would rather do to try to earn money. The mix of effort, pressure, people-problems doesn’t work for me but I can see how some people would revel in it.
Good luck on rest of your FI journey!
Real estate is just another asset class, however, I would argue that the market for single family homes is a very inefficient because one seller makes an emotional decision on one offer from one buyer at a time for a 6 figure transaction. Therein lies the quite a bit of opportunity.
Yes there is definitely an emotional aspect to houses. My house is absolutely a home and it would take a lot more than its market value to dislodge me from it in the next few decades.
If someone is a property investor I can absolutely see how having a rational approach in an emotional market can lead to money making opportunities
To answer your three questions
1) Looks like a good round up of the pro`s and con`s. I think unless you go into BTL treating it as a “side hustle” or as a part of a self employed portfolio, and ideally you went into it a few years ago AND had a healthy wodge of cash, it isn’t a market I would fancy very much from your viewpoint either.
2) I have two rentals, both great properties, with a good gross return, and an ok net return. Mostly very little hassle with tenants, voids etc (touching wood). My thinking about going into them was terrible….I definitely ran the numbers beforehand, but cant say I got that deep into it….both BTL properties are houses I lived in and didn’t sell when I scaled up (in family size, house size, mortgage size!), so a lot of my thinking was the bone idleness of not having to engage an Estate Agent and tidy up on the whim of a potential buyer!
3) You have it spot on, as per my previous answer, I think at the moment you have to be properly serious about the BTL market if you are new to it, you need a LTD company, you need to be very careful where you invest, you need a good team of contractors, you need a good agent, or you need time to do the management yourself. If you can go into it all guns blazing, then it can definitely still work, but it is anything but passive.
And one more downside, not being very popular in the press or seemingly with a lot of ordinary people….BTL has a really bad name…..
Thanks Serus. Yes I can see that if I was looking at this a few years back the numbers could have been much more attractive from a return on capital basis. If there is a major change in the market then I can see myself taking another look.
Good work on the start to your property empire! I know someone who did the same with their flat when they traded up. That would feel like an easy organic way to get into it if you want to test the waters…but we’re now in the house we hope to retire in (whether that’s early or not!) so that’s not a route for us.
I can definitely see that there is way to still make money in property but, as you say, I think that involves thinking like a business owner. Running a business appeals to me at some point, but I’m just not interested enough in property to make that the place I start!
For a long time I thought I wanted a rental property. But I’ve done the landlord thing in the past (I lived in a house and rented out the rest of the rooms.) And it was exhausting. Granted, money was much tighter then, so I’d be more relaxed now. But it’d still be work, emotional as much as physical.
Besides, I’m eager to pay off my current mortgage. I don’t want to turn around and go right back into debt. I think instead I’ll just increase my retirement savings or start investing once the house is paid off. Investing may not be as good of a passive income source, but at least it’s fully passive!
As with so many things in life I think that the idea can be more appealing than the reality. I guess that until, like you, I actually do it I won’t know if I maybe would enjoy it.
I’m a big fan of paying off mortgages! For me the emotional benefit outweighs any investing downside…but that will be personal for every one. As you say though the cashflow impact once you’ve done it is amazing.
Hi Caveman,
Have you looked into fractional property investment or other crowdfunding of real estate? It would quite literally outsource the whole process. I am thinking of platforms similar to Crowd Estate, Revinest24 etc.
Investing through such platforms allow you to save on many expenses like mortgage interest costs, purchase fees, maintenance etc., while still earning 12-15%.
One of the other things that I really like is that all of the transactions and dealings are dealt with by the platforms.
Just another idea!
Matt
Wow. I did have a quick look at REITs I haven’t seen anything that delivers that kind of return! I guess though that the risk will go up as well? I may have to do some research into it though…!
My basic issue with that sort of approach was that it was just another asset class so why go overweight in property rather than buying the whole market across all asset classes through a tracker. Those numbers give me a reason to look again at it though!
To own or not own a BTL is very much like the ‘to pay or not pay off the residential mortgage’ question – it’s very personal and individual.
I bought my own BTL 8 years ago with the sole intention of it being an investment for rental income (as opposed to capital growth). It’s the only property I own. In hindsight, I might not have purchased a leasehold flat but then, I wouldn’t have been able to afford a house so perhaps that was my only choice. My gross yield is 11%; after costs, I get around 6-7% net. It’s fully managed so I’m a totally hands-off landlord, I don’t want to get involved at all with the tenants etc. It was a big risk at the time as I knew nothing about being a landlord but as with investing, I just did my own research. My investment portfolio have now grown so that it is pretty much double the value/equity of my property so I think I’m probably more diversified than some whose main wealth is tied up in property.
Would I buy a BTL today? I’m not sure that I would – it would have to be a pretty special place in a great location.
Hey Weenie. Thanks for the insights. The benefit of having got into BTL a few years ago seems to be a bit of a theme! Those yields are really attractive so I can see why you did it. At a net level I think you would have to be cannier than me to get that sort of return now.
If it’s your only property as well it will get around my concern at being overweight in UK property already. You are really well diversified, for me my house equity is more than my investments and pension added together so I need to get more balanced.
I went into property about 4 years ago as part of my retirement plan and now have 8 properties where the rental income efefctively doubles my good final salary pension. I am already invested in stocks via index trackers and for me, property was a counter balance to that. Yes it can be a hassle and being a landlord is no fun – hence using agents etc. I have a Ltd company structure so the advnatages of that have been very useful from a tax perspective. I suspect i will consolidate in the future into one large unit and possible lease that out so end up with zero responsibilities.
100% agree that the numbners no longer ,make sense if you are simply doing 1-2 BTL’s in your own name but I would not rule it out completely as part of the strategy
Eight properties is a proper business and I’m very impressed you built that in just four years! It looks like you took the approach of seeing it through the eyes of a business owner. You’ve got both a short term and long term strategy. That seems to be a key message. The age of doing it on the side as a bit of fun seems to be past. I guess that’s a good thing for the sector. It should lead to higher standards and professionalism.
I’m not ruling it out 100% but let me modify my overall argument to say that it’s not for me at the moment.
Just found this blog, but as I am a landlord I think I can respond usefully.
I lost my job 6 years ago when I was 54. As I worked in IT getting anything equivalent was near impossible. I looked at my savings and found that with the inheritance I had just received I could live on my savings until I was 60 when my pensions were set to kick in. However spending capital did not feel right, so I put my money to work by going into BTL.
I get enough to live off with about 8% net returns and recently good capital growth.
I started off buying for cash as without a job I couldn’t get a mortgage. £270k got me three properties. After a while I could get mortgages and now I own ten, seven in my own name and three in a company (plus my home). I had to personnally guarantee the company mortgages so I have over half a million of debt. The interest rates are low and the properties are worth double that, I have not been affected by the reduction in mortgage interest relief yet as I am a basic rate tax payer. However now I am 60 and my pension will soon start paying I would be affected if I did nothing. I am selling my former home which being in the South has the lowest returns and for which I should not have to pay any CGT. I will use the proceeds to pay down mortgages in my own name and hopefully avoid paying the increased tax.
For me and many other Northern landlords investing in property is about the cashflow not capital growth. I regard capital growth as a bonus, though it was foreseeable that the new tram line and the boom in Manchester would lead to rising prices locally it has been higher than expected. Still it is the cashflow that I live off.
My pensions are worth more than my BTL equity, though the gap is closing. My home is worth about half the BTL equity.
Property is not just another asset. It has its own peculiarities. It is not very liquid. The cashflow is fairly stable unless it drops to zero for a particular property. I have had one bad tenant but of my 9 residential properties six still have their original tenants. Two have been there for over five years. You can borrow against property at low interest rates. I am remortgaging one property that has gone up £50k in three years and will be using the money as a deposit on another property.
I outsource almost everything about being a landlord. I don’t meet my tenants and mostly don’t know their names. Most of the work I do is the accounts. If a pipe bursts I wouldn’t know until I got the following months invoice. I do sometimes have to give approval for more expensives repairs, typically a couple of times a year. Its a job, but one that takes very little of my time.
Thanks Tony that’s a really valuable set of perspectives.
A c. million pound portfolio in 6 years is incredible, even more so when you’re getting an 8% net return is great. It sounds like you went into it with your eyes fully open. If I went into it I would do the same as you and focus on cashflow from rent rather than capital appreciation.
As a few people have now commented there is a key aspect around professionalism in all of this. Multiple houses, understanding the nuances, understanding the financing peculiarities. Through outsourcing you’re essentially got a a virtual team that you’re managing. I can see how that would work.
I guess the bottom line for me is that I’m just not interested enough in running that kind of business. As I’ve said in another post there are good reasons for me to enjoy my current job so I would rather do that. Of course, if like you, circumstances forced me to make another choice I think that I would look again.
For me, property was my only viable option. I’m new to it having bought 2 family houses in the last year. I went into it with eyes wide open after the tax changes. It still worked out for me.
A bit of background helps here. I’m disabled and medically retired. I can’t work anymore and have a tiny pension. This means that with 2 properties only I stay under the lowest tax threshold. I don’t think it would work otherwise. My 1st house returned 6-7% net last year and my 2nd one has just been tenanted. It looks like a similar return will be expected with this one too. They are both family homes, not HMO (too much work) in the same area. They are fully managed and I’ve never met the tenants. So far, it’s been easier than I thought but it’s early days. My 1st tenants have just renewed for another 2 years so I take that as a good sign.
I felt that I had to do something as I don’t have a pension worth mentioning. I remortgaged my home to fund the btls. I don’t intend to ever sell them, but it’s nice to know it’s an option if needed. It’s all about the income. They pay for themselves, the management and about 80% of my home mortgage. When hubby retires we intend to downsize and will hopefully be mortgage free by then. For now, I’m investing the net income in s&s isas ready to bridge the gap until hubby’s pension can be drawn. We did a lot of research and it seems the sensible route for someone whi cannot be employed and who isnt a tax payer. Our main route to FI is living simply as we are at the lower end of income. I would like to have hubby retire early as I don’t know how many years we have left together. Time is far more precious to us. The btls are hopefully going to help us achieve this time together.
I know this is far from the normal btl story. It just shows that everything has it’s place. If I was a high rate tax payer I wouldn’t have bothered! Now I’m turning my learning to index funds. Better (very late) than never! We’re aiming for retirement in 7 years when DD leaves school and hubby will be 55. It’s tight but we work better with goals. Lol.
Thanks for your blog. We recently found it and your philosophy speaks to us. We’re now both subscribed (aka stalking!).