≡ Menu

A landlord is someone who borrows money on your behalf

Tenant, landlord, homebuyer, banker — it’s all about the money.

I have explained before how a mortgage is money rented from a bank.

When you buy your first property with a mortgage, you don’t leave the renting classes behind – you simply do your business at the more respectable end of the High Street, and rent the money needed to buy the house from Natwest or Nationwide.

Instead of giving brown envelopes stuffed with tenners to a bloke called Trevor every Thursday for the honor of living in his dive in New Cross (in spirit, I appreciate we all use bank transfers nowadays), as a newly indebted homeowner you pay ‘money rent’ every month to the bank on the lump sum it lent you to buy your home.

It’s a different way of thinking about home buying and mortgages. It doesn’t mean in itself that renting or buying is better or worse.

By the same token, this article is also not about whether you should own a home or not (or whether prices will go up or down or whether the younger generation is shafted or whether the market will crash next Tuesday or any of the usual).

It’s a thought experiment.

Let’s imagine we’re dressed in white togas eating grapes like Greek philosophers, and have ponder.

A house? For me? How kind!

So, a mortgage is money rented from a bank. Sort of.

But what about when you rent a property from a landlord?

Is that just, well, renting a property?

Of course.

But there is another way of looking at what’s going on, which adds another financial jui jitsu move to your mental arsenal.

Instead of thinking of your landlord as someone who owns the house or flat they rent to you, you might think of your landlord as someone who borrows £250,000 or £500,000 or whatever to buy the property on your behalf.

He or she borrows the money, and as a result you don’t need to do so.

You pay him rent for the privilege of him borrowing this money. The cost is usually marked up for his trouble, so your rent is higher than if you’d rented the money from the bank yourself.

In addition, your decision to rent hands the option to make money from rises in the property’s price to your landlord.

Then again, you’re also insulated from the risk of falling house prices.

The interesting thing about landlords and mortgages

This is in fact very close to what happens in practice.

Let’s say you’re renting 29 Acacia Avenue from your lovely landlord, a Mr E. Wimp Esq.

You pay him £1,000 a month to rent his house, and when you see him in the street you tug your forelock (whatever a forelock is) and generally feel like one of the oppressed classes.

You presume Mr Wimp owns the house – and legally he does.

However he doesn’t own it outright.

Instead, like any financially savvy landlord, Wimp bought the house with an interest-only mortgage. He repays no capital, and in fact as house prices go up he remortgages every few years, increasing his debt on the house and rolling the equity released into new deals to buy more houses.

Buying, growing, releasing equity, and re-investing capital that’s leveraged through Other People’s Money – i.e. mortgages – is the heart of most property enrichment schemes. It gives Mr Wimp access to financial firepower that he could probably never have amassed in his lifetime from saving alone.

And Mr Wimp enjoys another great benefit from using interest-only mortgages to finance his properties.

The interest he pays on a mortgage can be offset against the rental income you pay him, in order to reduce his taxable profits.

For this reason, a landlord will typically try to keep his or her interest-only mortgage payments at about the same level as rental income. This way they can effectively reduce their tax liability on the rental income to zero. (Especially as he also gets to make deductions for wear and tear and the like).

When the mortgage – and hence the capital owed – comes due after 25 years or so, a landlord would usually aim to either sell-up the property and repay the mortgage, pocketing the difference, or else refinance the property with a new mortgage.

The alternative strategy – steadily amassing equity in a property by gradually buying it outright with capital repayments – would over time reduce the mortgage interest bill. This would therefore increase taxable profits – and taxes paid – as there’s less interest paid to offset against the rental income.

Of course a landlord might choose to own a property outright for other reasons – such as avoiding having to sell or re-finance in 25 years – but from a near-term tax efficiency perspective, a big interest-only mortgage is the way to go.

(Capital gains tax is another matter altogether. Whereas an owner-occupier can sell her home free of capital gains tax, a landlord is liable for taxes on capital gains).

It’ll cost you extra

As a renter, instead of you using a big mortgage to buy your property, your landlord has taken out a big mortgage to own the same property and to rent it to you.1

However in both cases you – the occupier – is servicing the mortgage.

  • If you own the property, you’re repaying your mortgage to the bank, likely over 25 years, and probably repaying capital as as well as interest.
  • If you rent the property, you’re paying your landlord’s mortgage, which is likely interest-only, via your rental payments.

Typically the rent paid to your landlord will cost you more than if you bought the same property via an interest-only mortgage.

This is because landlords aren’t in it for charity, and they want to make a profit.

Note: An interest-only mortgage is the correct kind to use for like-for-like comparisons between the different options, because it ignores capital repayments. Such repayment of capital is a separate issue (really it’s a form of saving).

Consider a two-bed property that costs £200,000 to buy:

  • A 4% interest-only mortgage costs £666 a month over 25 years.
  • Your landlord might charge say £750 rent a month– which is an effective rate on £200,000 of 4.5%.

By renting, it’s as if you’re paying a slightly more expensive interest-only mortgage than the landlord, and in addition you’ve hedged out house price gains and falls.

You’ve given up security of tenure in the deal, too.

On the other hand, you didn’t have to put in a deposit, so your free capital can be earning money elsewhere.

In addition, your landlord has to account for wear and tear to the property, whereas you can call him up for a new boiler. There’s also a risk that if you move out he won’t immediately find new tenants, forcing him to cover the gap in payments from his savings.

But you can’t bang nails into his walls.

However he paid all the transaction costs of buying the property. You just paid a month’s rent as a deposit.

And around and around we go…

The point is there’s a mix of pros and cons.

Lording it up

The key idea I wanted to get across today is the relationship between your rental payments and the landlord’s mortgage.

But here’s a few consequences to think about.

One very strong case for home ownership is to be your own landlord

If someone wants to rent you a property, then clearly they think it’s worth at least the monthly interest-only bill to do so, plus profit coming from either the surplus over the mortgage from the rent or gains in house prices, or both.

But as I mentioned, as well as any profit margin and an allowance for wear and tear, a landlord also has to charge a higher rent to cover the risk that a tenant doesn’t pay up or of a gap between tenancies.

As a homeowner you are effectively letting the property to yourself and these things are under your control. So unless you’re a member of a 1970s heavy metal band with a penchant for throwing TVs out of windows, you’re your own ideal tenant. By buying and renting the property to yourself, you get a better deal, because you pocket the profit margin, and you’re not paying extra to cover those overheads and unknowns.

Owning a home is more tax efficient than renting one

It’s true that UK home buyers no longer get mortgage interest tax relief, and that does put the landlord at a slight advantage from that perspective. However on the portion of your home that you own you’re effectively paying monthly rent (as imputed rent) free of tax issues. In contrast if you were renting you’d have to find the money to pay for the whole house each month out of taxed income.

For instance, if you own £100,000 of that £200,000 house, then you might have say £750 of ‘imputed rent’ that you don’t actually pay, and equally that you don’t have to find out of your taxed income. (This is a weird concept I know, so read the Wikipedia page on imputed rent).

Your home is also free of capital gains tax if you sell, so if you downsize to a smaller place or leave the property market, you don’t pay tax on any money that’s released. Landlords gains will be taxed.

Presumably, in a rational market the landlord takes that future tax liability into account when setting rents. So as a homeowner you should be able to make the maths work more comfortably than the landlord can.

Money NOT in property is NOT automatically dead money

I hope this post is another way of seeing that money spent on rent is not ‘dead money’.

Whether you rent or have a mortgage, you’re still paying an interest bill.

Equally, even if you’ve paid off your mortgage, the capital locked up in your home is not being invested elsewhere. And that has an opportunity cost.

Now I happen to believe most people do much better owning their own home than with shares, which is the only asset class likely to keep up with UK house price inflation over the long-term.

But if you’re a skilled investor who can earn, say, 10-15% a year from investing on average, then it might be worth renting from a landlord, even at an effectively higher interest rate, in order to avoid having to sink a big deposit into a property. You’d invest instead of paying off a mortgage. You’d have to be investing in an ISA or a SIPP to match the CGT-free nature of owning your own home.

Keep in mind though that a home bought with a mortgage is a geared investment, and those are very hard to beat with ungeared investments – presuming house prices keep going up at historical rates, of course. (If house prices fall for 20 years you’ll be laughing).

You might not be ready or able to buy yet

The reality is that not everyone can buy, even if monthly mortgage payments would be lower than their landlord’s monthly payments plus their mark-up (aka their rent). They may not have a deposit, or they may not be considered a good credit risk by a bank.

This has always been true for many 20-somethings – the controversy today is that it’s true of many people in their 30s and 40s, too.

A lot of it comes down to house prices

I have danced on a pinhead above discussing how a landlord may make a few more quid from rent after costs and so on. In reality, most landlords who got into the game in the 1990s have made out like bandits from house price appreciation, compared to any profits they made from rent.

Most old-time landlords say price appreciation should always the eventual goal, but when buy-to-let mortgages and legislation changes first democratized being a property mogul, it was also common wisdom that you should get at least a 10% yield on your purchase price.

Today yields are far smaller – more like 4-7% – but then mortgage rates are also far lower. Ultimately, winners and losers will likely be decided by the trajectory of the UK property market over the next 10-20 years – the ‘option on house prices’ I mentioned that a renter gives up to a landlord.

None of this is rocket science, but I hope it’s revealed a few of the semi-hidden dynamics of renting versus buying a home.

Please note: Constructive discussion about the mechanics of the UK property market in the comments would be great. Tirades about greedy landlords / young renters who spend all their deposit on iPhones / how the UK is going down the toilet unless we vote UKIP will probably be deleted.

  1. As I said before, we will leave any rights and wrongs of this for another day… Head to HousePriceCrash if you can’t wait, rather than arguing it here please. []
{ 39 comments… add one }
  • 1 Under The Money Tree November 26, 2014, 4:56 pm

    “Most old-time landlords say price appreciation should always the eventual goal”

    I’ve been in the BTL game for a while and think differently to this. I invest in BTL to benefit form the future income once the mortgages are gone. I (currently) pay the mortgages via a mix of capital repayments and investing in shares to build a final payment pot.

    IF i have any price appreciation equity once the mortgages are gone then great, I’ll pay my capital gains tax and invest that capital to further boost my retirement income. Hell I may even sell up entirely, pump the $ into a SIIP, get my tax back and buy an annuity!

    I may not run the most tax efficient or leveraged BTL strategy but it is pretty low risk in my eyes and should keep me in werther originals someday!

  • 2 qpop November 26, 2014, 5:11 pm

    I read an interesting idea on an online forum of renting but owning an equivalent-to-the-value-of-a-house REIT portfolio, which in theory should pay your rent for you and save you all the hassle of actually having to buy/sell property yourself.

    I can’t remember if the person involved had actually done it or if it was their aim, but either way it’s an interesting sideways approach to partaking in the property market but leaving your options/liquidity open.

  • 3 Mathieu Lebrun November 26, 2014, 5:25 pm

    nice article!

  • 4 lemonhd November 26, 2014, 6:12 pm

    An intersting angle of the rent/own argument – easy to explain to the kids (when they ask). Look forward to the next post!

  • 5 Steve November 26, 2014, 7:25 pm

    “Tirades about greedy landlords”
    I always find it funny how landlords are always referred to as greedy but bankers always dodge that perception, when was the last time you herd someone say “I have just got a mortgage off the greedy bank to buy our perfect house”.
    As you have already pointed out most landlords hand a big percentage of the rent over to the banks but they get off scott free,they give poor old pensioners 0.5% interest on there savings and lend it out at between 4 and 29% ( mortgages to credit cards) .
    Maybe its the money they spend on advertising!
    Landlords actually get a fair return on there investment for the risks they take on,if you look at it between 4 and 6% is a very low return for what they offer,I have investments that have done far better that my investment properties.
    In aj mucklows last annual report it mensioned that £1000 invested at the beginning when aj mucklow started in the 60’s I think,would be worth 1.2 million now (just from memory could be a different number) but my old man pointed out that this was far better return than the house he bought.

  • 6 Ben November 26, 2014, 8:10 pm

    Good article. Couple of quibbles:

    1. “It gives Mr Wimp access to financial firepower that he could probably never have amassed in his lifetime from saving alone.”
    Change to “never have amassed from saving a portion of his wealth generation through working” and you see why the UK is melting down.

    2. I agree interest only is the best way to compare vs rent, but the fact is most debating buying vs renting who go on to buy are on a repayment mortgage. It would be interesting to hear your thoughts on amortized mortgages as a “buyer” who sells up after 5 years on a 25 year term is not seeing equity of 20% but rather far less. In today’s climate of low job security this is more common than not.

  • 7 BillytheBugle November 26, 2014, 8:30 pm

    Some great advice, I’m sure, but despite this, I’m still not sure which direction to go with my own financial dilemma. I own a home, mortgage free. For work reasons, I need to move out of the house and to a different part of the country where I will be able to rent a property well below the market rate.
    I have the choice to rent out my property, or sell it and invest the money. The property is in the north east of England, where property prices are currently stagnating, so selling may be a challenge, but renting it out could be straightforward; it would need to be let out by an agent, eating into any potential profit, as will the tax on the income.
    In simple terms, is selling or renting a wiser option – all advice appreciated.
    (Clearly – I will be seeking proffesional advice, but I recognise many of the respondents to these blogs have considerable experience in both renting properties and investing, so I value a range of opinions!)

  • 8 moneystepper November 26, 2014, 10:39 pm

    As a landlord, I like to think in terms that “a tenant is someone who pays all my expenses whilst I profit from the capital gains”.

    Good points on those not ready to buy, but I would also add that it isn’t just people who don’t have a deposit or a sufficient credit score. More importantly is whether people are truly financially ready and in a position in their life and relationships where they are ready to make such a financial commitment.

  • 9 living cheap in London November 26, 2014, 11:00 pm

    @Billy – my personal biggest financial regret is selling my first home when i changed cities. At the time the mortgage & being a distant landlord felt too risky for my younger self, but in reality i could have rented it easily for more & earned some decent (relatively) passive income over the years. Looking on Zoopla it’s now valued at £350K more than i bought it for in the late 90’s, though it’s had a lot of money spent on it too over that time too of course.

    @TheInvestor – i would also argue that owning a house protects you more from increasing rental costs as time goes along, whereas on your home you can increasingly get better rates in the market as your LTV improves (i think it’s fair to say that ratio improves regardless of what is going on with the wider property market & with interest rates in a relative sense). Great article btw.

  • 10 SL November 27, 2014, 12:11 am

    Great article and an interesting way of looking at it. The thing I would add is that you cannot renovate a share portfolio, investment fund or sensible shoe tracker.

    You can, however, buy a property and spend some money to make it nicer that will increase its value. Even cheap simple stuff like painting, new carpets and a decent bathroom is enough to add thousands if you simply flipped the home.

    Obviously transaction costs only make that worth it when people are making out like bandits.

    That’s why I would suggest it’s always better to opt for a scone hand property rather than a brand new turnkey place. Those new build flats caught a lot of people out in 2006 to 2008.

    Buying and doing some work to add a bit of value also buys you a margin of safety.

    Property is, of course, illiquid though and that can spell big trouble.

    The threat of ending the interest tax offsetting for landlords keeps cropping up, but I can’t see it being done practically as the principle is that it’s a business and a change would simply give rise to a whole new tax avoidance industry .

  • 11 SL November 27, 2014, 12:12 am

    That’s second hand property of course, I am not sure those ‘scone’ hand’ ones will ever sell like hot cakes.

  • 12 Baby Boomer in Croydon November 27, 2014, 12:26 am

    Having invested in a house to live in at a very young age that cost the same as my wife’s bosses E Type Jaguar and having lived on the continent for a number of years I have come to the conclusion that the whole system is broken.

    If Mortages were limited to multiples of salary (say 3) in my youth I have afforded to buy a house on single income. Equally we had the choice to look after the children at home or to pay for child care out of another income.

    Changing borrowing limits created an environment that two people need to work to buy a house, created needs or child care benefits and because the UK pension cannot support renting in retirement then the need to buy a home.

    These driving forces of a broken system distort the housing both on a rent or buy basis. If its cheaper to buy people will buy and if its cheaper to rent they will rent it just a matter of how long it takes to reach the equilibrium.

    Other countries have more long term rental property that offers sustainable living for people in work or in retirement. Not so in the UK on a state pension.

    So if we fix lending limits, child care, state pensions and affordable house building we might just get the balance right. It not all about investment returns.

    In the circumstances of the UK I would recommend sticking to house buying if you can afford the investment or move to more affordable areas of the UK if you can find employment and like living there.

  • 13 weenie November 27, 2014, 12:30 am

    Interesting article and views on a topic that can get some people ranting!

    I bought my BTL property for the rental income (half of which now gets invested in my SIPP). As it’s in the northwest, I don’t anticipate much capital potential so I’m not looking to sell. Like Under The Money Tree, I’m sure I’m not running the most tax-efficient BTL strategy but I can’t fault the net rental yield of over 6.5% that I’m getting.

    All my tenants so far have been working professionals on good salaries – I guess they’re either happy renting, or they’re just not ready to buy themselves. I’m just providing them with somewhere to live.

  • 14 theta November 27, 2014, 12:34 am

    Very good article, with balanced presentation of pros and cons of both renting and ow(n)ing. I do however have a strong objection with your mentioning of the “option” of house price appreciation. It’s not an option, something that would imply participation on the upside but not on the downside. Instead it’s a forward contract if you will, participating on both the upside and the downside 100%. This is a very important distinction in my view and one that especially in the UK is not really well understood, given the common belief that “house prices always go up eventually”.

  • 15 The Investor November 27, 2014, 1:05 am

    @theta — Yes, that’s a good point. Perhaps I should tweak the article.

    @all — Great comments and minimal hyperbole — cheers!

  • 16 Tramp November 27, 2014, 1:07 am

    Excellent article.

    However it doesn’t quite capture the mind set of the battle-hardened landlord.

    I would think that a lot of landlords who started buying in the early 2000’s may well have done much better that they ever thought they would, especially if they didn’t hit the remortgage button to much to reinvest, eventually getting caught out in 2008.

    I know some, who have become wealthy on paper simply by keeping their costs tight, ensuring that their properties were occupied and allowed the rents to naturally drift up.

    In terms of yield, I have always thought that this is not the correct way to approach property income and is perhaps a spin-off from shares investing. A much better and more accurate way is a simple ROI calculation.

    For example, let’s say I purchase a BTL at £50K with a 20% deposit and legal costs of £500.I spend a further £1000 to bring the place up to scratch. My outlay is £11,500 and my achieved rent is £420 PCM.

    Assuming the following numbers…

    Annual rent ……… £5040
    Void ……………….. £504
    Repairs ………….. £504
    Net rent …………. £4032
    Mortgage on £40k@4% £1600
    Net profit ………….. £2432

    Initial outlay was £11,500 with a profit of £2432 which gives an ROI of over 21%.
    This is ignoring any capital appreciation as this is unknown until the property is sold, the capital gains allowance applied and the profits banked.
    Of course the above example is in no way a passive investment and needs a very particular set of skills (Liam Neeson ), and it is these which provide the money shot.
    If you extrapolate this to say 10 properties, it could give a nice income for a part time workload.
    I am aware of many landlords who have a bigger portfolio paying a much lower (2%) interest rate and pulling slightly higher rents which then makes the whole thing much more lucrative.
    It is the low interest rates which have allowed them to do this.

  • 17 Neverland November 27, 2014, 9:24 am

    Sometimes the financialisation of everything in the UK does make me pretty sad….whatever happened to houses as a place to live?

    I do think we’ve got to the point where we understand the price of everything but the value of nothing

    Houses, especially as we have been building too few of them for 25 years, should be a special case subject to government regulation rather like education or health

    There is also the case of whether its advisable to allow individuals to run up six or seven figure loans across multiple properties using debt from financial institutions backed by tax payers at a time of 300 year lows in interest rates….looks to me very much like another case of privatising the profits while preparing to socialise losses

    Still I can look forward to the Monevator article of 2024 where we discuss the investment merits of investment in individual student debt contracts….

  • 18 EP November 27, 2014, 11:05 am

    BillytheBugle – if you are a 40% tax payer with a significant amount of unused pension allowance (and assuming you can sell your house….) my advice would be:

    Sell the house. Use part of the proceeds to put down a 40% deposit on the new house to ensure you can get the best mortgage rate (i.e. like HSBC base +1.5% if a tracker is your thing), you may also want to consider going interest only.

    Use the rest of the money to ensure you use up as much as possible of each years pension allowance, this effectively gives you a starting 40% return on the excess cash from the house sale for free (within a pension obviously – this may or may not be your thing depending on your time of life). (As to what to invest in…..well…IMO a global index tracker of some form will easily outperform UK house prices over the coming decade(s)).

  • 19 David November 27, 2014, 1:07 pm

    There’s a bit of a nasty drawback, though, in being an ‘owner’ rather than a ‘renter’ and that’s if you have only purchased the leasehold to the property [e.g. a flat] rather than the freehold.

    The lease usually prescribes periodically-increasing ground-rent charges payable to the freeholder (on pain of eviction in the case of default) and you’re lumbered with service charges over much of which [e.g. buildings insurance purchased with kick-back commission to his benefit by the freeholder; managing agents’ fees] you probably have little or no control.

  • 20 BeatTheSeasons November 27, 2014, 1:50 pm

    And to take it further, a landlord is also someone who provides the capital that’s needed to build new properties in the first place, whether or not they borrow it from a bank.

    In an inflationary economy both capital values and rents should increase in the long term where land supply is constrained, which is why the benefits for the landlord should always eventually be greater than they are for the tenant. But only if the landlord buys the right property at the right price!

    Yield chasers looking north may be buying into the property equivalent of a “value trap”. Strip out London and the average UK house price is now £133,538 compared to £158,494 in 2007. That’s a nominal fall of 16% or 35% in real terms. Ouch!


  • 21 kean November 27, 2014, 2:02 pm

    Very interesting take! Food for thought most certainly 🙂

    @theta – completely agree!

    A few years ago, I had to make a decision about whether to let a property or sell. On the whole decided I don’t have the personality nor required level of emotional detachment to be an effective landlord.

    That aside, as an owner occupier, I often wonder whether being a tenant is better. There is always something that needs repairing/ maintaining AND finding reliable trades people these days is not easy. Have twice ended up in small claims court. Then there is every type of insurance you can think of & worries about what’s owner’s responsibility, the councils or neighbours. (a total minefield: talking from experience here!) All in all, wondered about throwing the towel in.

    Ultimately every aspect has a cost attached whether that is £ or emotional. If the decision to buy-occupy is purely about monetary returns in whatever form then arguably there are other options to secure your future.

    As for BTL – unless it is for the purpose of becoming a professional landlord who is willing to run it as viable commercial business – return on equity; tenant retention/satisfaction; etc., then again it is a risky business which comes at £ and/or emotional cost.

    In conclusion – it is a case of grass is always greener on the other side. Agree with the underlying sentiment of the article – balance pros/cons because neither option (buy/rent) is for everyone. :0)

  • 22 PF November 27, 2014, 3:19 pm

    “Please note: Constructive discussion about the mechanics of the UK property market in the comments would be great. Tirades about greedy landlords / young renters who spend all their deposit on iPhones / how the UK is going down the toilet unless we vote UKIP will probably be deleted.”

    This is correct use of the British English adverb “probably”. Elsewhere in your piece you have used the American adverbial “likely” (a word that is, in British English, solely an adjective) to mean exactly the same thing.

    Why the inconsistency?

  • 23 ermine November 27, 2014, 4:17 pm

    On @theta’s point, I have had the dubious privilege of paying down nearly 50% of a house price into the toilet of negative equity in the 1990s. Leverage is not a one-way bet. In fairness I should say over a 25 year term that’s been redeemed, but whenever I read articles about how great property is as an asset class I do wonder – you can’t call it until you’ve been through the whole market cycle and weathered the depths of the winters as well as the euphoric summers.

  • 24 The Weasel November 27, 2014, 6:18 pm

    Funny how people gladly walk into a hugely leveraged investment like property without batting an eyelid but balk at the idea of investing in the stock market un-leveraged. I guess it has to do with the fact that they can touch the bricks and mortar whereas shares are “only numbers on a screen”. And on top of it, they put all their eggs in this over-leveraged property basket when they decide to be landlords too. I guess it’s because property only goes up, right?

    Anyway, it was only after I bought that I realised people aren’t comparing like for like when they compare rent to an equivalent repayment mortgage. With repayments, the capital part is still yours (yes tied up in the illiquid asset, but still yours) and the interest now becomes the rent, which gradually reduces over the years. So, viewed from a balance sheet perspective you are much better off paying a given x amount in mortgage repayments than the same amount of rent.

    I’m conveniently ignoring negative equity, which of course only becomes an issue if you can’t repay, lose your job, need to move, or otherwise have to sell.

  • 25 magneto November 27, 2014, 9:28 pm

    Warning to Would Be Landlords
    These figures were put forward by Tramp in an earlier comment above :-.
    “For example, let’s say I purchase a BTL at £50K with a 20% deposit and legal costs of £500.I spend a further £1000 to bring the place up to scratch. My outlay is £11,500 and my achieved rent is £420 PCM.
    Assuming the following numbers…
    Annual rent ……… £5040
    Void ……………….. £504
    Repairs ………….. £504
    Net rent …………. £4032
    Mortgage on £40k@4% £1600
    Net profit ………….. £2432
    Initial outlay was £11,500 with a profit of £2432 which gives an ROI of over 21%.”

    What could possibly go wrong? With these figures everyone should be a landlord! As long term landlords ourselves we regard Rental Real Estate (BTL) as a useful diversifier, but would urge caution before going overboard :-
    Tramp uses ROI rather than ROCE. No business would use this figure, with cheap leverage masking the underlying profitability of the asset.
    The example gives a yield on the property of about 8%. Our experience at today’s property prices is 4%-5%, and less for larger properties. In a bad year of heavy refurbishment expenses between tenants, cash flow can be nil sometimes negative. With the hassle factor from managing real estate, most seasoned landlords are looking for double digit rental yields, not currently available.
    Ongoing repair and other costs are surprisingly low in the example.
    After steadily rising the Halifax Avg Property Price fell from £197,244 (Dec 2007), to £159,896 (Dec 2008) a fall of 19%. If repeated this would leave our investor with a slim remaining 1% equity, and next time the fall might not stop at 19%.
    What would the effect of rising mortage rates be? Doubling of the rate would, using our yield figures, leave a negative cash flow.
    Real Estate is illiquid. Investor may have to sell at a distressed price, unless his overall investment portfolio is soundly constructed to satisfy sudden calls for cash.
    Any upsides from this grumpy landlord? Yes the rental yield is a real yield (income increasing with inflation) like stocks, and the mortgage is repaid in future inflation eroded sterling, so inflation can be deducted from the mortgage rate.
    Take care.

  • 26 ermine November 28, 2014, 12:30 am

    @magneto I agree with the general sentiment. However:

    > income increasing with inflation

    There is a hidden assumption there. Which is that the putative tenants’ wages rise with inflation.

    It was a long time since I was at school, where the Dario Fo play Can’t Pay, Won’t Pay was de rigeur in those troubled times following the oil shock of ’73.

    Obviously it’s all different now, people’s wages will track inflation for the foreseeable future, despite what the Canuck head honcho of the Bank of England has to say on the subject. Let’s hope he at least keeps interest rates down, eh?

  • 27 magneto November 28, 2014, 11:37 am

    @ ermine

    Good points!

  • 28 Tramp November 28, 2014, 5:26 pm


    I am simply pointing out the reality of the situation. The fact that you don’t agree is irrelevant.

    The point of my post is that there are a number of landlords who have bought in cheap in the late 90s / early 2000s and haven’t over geared.

    As prices rose and then stagnated circa 2008, the fall in interest rates and the fact that they take a hands on approach have made some good income streams. This is a business where supply is decreasing and demand increasing.

    In terms of your comment “no business would use this figure”, again this is irrelevant because each business is different and each has its own idiosyncrasies.

    I don’t think that anyone is advocating property investment in today’s market, with higher prices and a choked money supply, however if late 90s you identified a lucrative business opportunity, locked in the capital gains and were lucky with the low interest rates environment of today then you deserve to be rewarded for your vision.

  • 29 magneto November 28, 2014, 5:41 pm

    In light of last post, think we agree far more more than we disagree, esp re paras 2 and 5.
    All Best

  • 30 FKW November 29, 2014, 10:59 am

    Thanks for a really interesting article and follow up comments. I just wanted to share my experience and a more personal take of being a landlord over the last 23 years.

    I invested steadily in the London buy to let market between 1992 and stopped buying in 2004 when (I believed) the maths no longer justified the investment given (i) the increase in property prices and (ii) the decrease in rental yields (due to the proliferation of rental property availability at that time). I also continued in full time employment and had 2 youing children so felt I had more than enough on my plate.

    I was committing ‘investment suicide’ as one financial adviser put it by investing 100% in property. It is only more recently that I started maximising SIPPS and ISAs – investing in simple passive investments largely due to information and advice from this site -thanks Monevator.

    Apologies for this lengthy preamble but think this context is important before I went on to make the following statements.

    The point about gearing is spot on. I do not see how I could have achieved the level of net worth and income the property portfolio has provided with any other common form of investment (when time is on my side one day I will do a spreadsheet exercise to estimate what outcome other investments may have yielded over the same period).

    However, I have always dealt with all aspects of running the properties myself and it cannot be underestimated how much it has dominated and shaped our existence as a family every day dealing with the day to day issues that arise as a landlord, lessee and freeholder.

    Monevator once wrote in an article something along the lines of if you want to make money do something difficult – well BTL falls into that category. Holidays, weekends and evenings do not free you from the numerous responsibilites of looking after this type of asset class. It has been a financially rewarding but incredibly stressful journey.

    If you are considering embarking on this route, my only suggestion is to fully consider both sides of this coin before taking the plunge.

    Thanks again to this community for informing, shaping and maturing my attitude and approach to investment in recent years – this is a genuine public service.

  • 31 The Investor November 29, 2014, 1:47 pm

    @PF — Likely because I don’t care. It’s 2014, and our language like all languages constantly evolves. Perhaps you talk like a character out of Shakespeare. If not, why not? 🙂

  • 32 rajkanwarbatra November 30, 2014, 5:12 pm

    I have to disagree with the conclusions of the article somewhat. I think as others have mentioned above in comments there are a number of things which make it much better to at least own your home over long term rather than rent.

    These being:

    + Forced saving if you have a repayment mortgage. You don’t have an option not to repay which means you cut your other expenses. If that was not the case it is easy to overspend as many people can only think in cash flow terms.

    +Any repayment is earning a return equal to your mortgage rate which is currently much much higher than what you can get in a bank. By definition this should be the case any way as you are cutting out the middleman the bankers.

    +Provided one avoids buying in a bubble market (such as is currently in London) the inflation effect should ensure that over a lifetime one would end up with a nice pot of money. This works because of gearing involved. I explain this phenomenon in my blog post:

    The above also work somewhat with BTL but the comparison is not direct.

  • 33 The Investor November 30, 2014, 5:41 pm

    @ rajkanwarbatra — When I read comments like yours, I do sigh sometimes.

    Comments by intelligent people who seemingly have read the article but but are apparently overwhelmed by the fact that I’ve considered more than one angle and not just blasted out some firm and final judgement, as if I was the all-seeing wise one and as if there was always one answer to every question. (i.e. The normal Internet article approach! 🙂 )

    Let’s see what I wrote in those concluding paragraphs, cutting out some of the waffle:

    “One very strong case for home ownership is to be your own landlord

    If someone wants to rent you a property, then clearly they think it’s worth at least the monthly interest-only bill to do so, plus profit coming from either the surplus over the mortgage from the rent or gains in house prices, or both. […]

    By buying and renting the property to yourself, you get a better deal, because you pocket the profit margin, and you’re not paying extra to cover those overheads and unknowns.[…]

    I happen to believe most people do much better owning their own home than with shares. […]

    If you’re a skilled investor who can earn, say, 10-15% a year from investing on average, then it might be worth renting from a landlord, even at an effectively higher interest rate, in order to avoid having to sink a big deposit into a property. […]

    Keep in mind though that a home bought with a mortgage is a geared investment, and those are very hard to beat with ungeared investments – presuming house prices keep going up at historical rates, of course.”

  • 34 Sue Haines December 2, 2014, 1:24 pm

    All this buy-to-let business is extremely complicated, isn’t it? I’m a landlord but only own one rental property (bought outright after divorce and downsizing to allow for purchase of a two bedroom rental house). I did this purely to supplement my state pension and small annuity payments, so for the foreseeable future it provides me with an income. I rent out via the local council to a tenant on housing benefits and manage the property myself. I get less rent than if I were using a commercial agent but I have the satisfaction of organising repairs myself (and doing my own very thorough cleaning between tenancies) and providing a really nice small house for a mum and young child which might not otherwise happen in view of the sale of council houses since Mrs T’s ‘initiative’ and lack of social housing investment. I dare not take risks with mortgages etc at my stage of life and intend only to sell the house if I need nursing home fees later on! Otherwise, if they’re lucky, the kids will inherit…. Guess I’m not typical.

  • 35 Warren December 3, 2014, 9:36 am

    “i would also argue that owning a house protects you more from increasing rental costs as time goes along”

    I’ve found this to be the case. I bought my flat in London from my landlord. For five years (2007-2011) I paid £1100/m in rent. I purchased it from him and the cost of the repayment mortgage was £722/m at a time when both house and rental prices skyrocketed. At the end of 2013 I moved abroad and rented it out for £1600/m, which was the going rate at the time. It let in under an hour. There was an additional 1% load on the mortgage which took the cost to £822 per month.

    1. I’m still in the same job and my income hasn’t gone up that much. If I was still in England, there’s no way I could afford £1600 rent today to live in the same property or area. I would have to relocate or find a vastly higher paying job.
    2. It’s easy to look at the mortgage vs. rental income and say “greedy landlord” but the flat is lousy as an investment. If the property didn’t increase in value, I’d be looking at around 3% returns before tax. Given that I could probably sell up now for possibly £150-200k profit, I’m looking at around 1% returns annually.

    The only benefit I’m really getting is a manageable housing cost if I decide to move back to London, and a possible shot at a really big sale much further down the line.

  • 36 Move Out Mates January 15, 2015, 2:54 pm

    I think people easily forget how risky a rented property can be for a financial investment.

    It’s also too easy to brand a landlord as too greedy because the discrepancy between the mortgage they pay and the rent they receive is a few hundred pounds.

    However, there are a lot more financial costs for a landlord than just paying back the mortgage. There are maintenance costs, repairs, replacements for broken equipment and furniture, gaps between tenants and so on…

    Only to illustrate that risk, let’s say landlord A has a property under mortgage that he pays 750 pounds a month.

    Tenant A rents the apartment under a standard AST for 12 months with a monthly rent of 1000 pounds. That’s 250 in the landlord’s pocket each month.

    However, the boiler breaks and the average quote is around 250 pounds, depending on the service provider and the damage, of course. That’s alright, but tenant A works two shifts and cannot accompany the repairmen.
    The landlord now has to take half a day off work to provide access for the repairs, but their travel time is nearly an hour per direction from their work to the property in question.
    This makes it a full day off, which on average would cost the landlord 100 pounds or so.
    This makes it up to 350 pounds off the landlord’s pocket so far, and, it’s only just beginning.
    Turns out the boiler was more damaged than originally though and after two weeks it completely wrecks, calling for a brand new purchase. This of course can’t be done ASAP and will take at least a week in everybody’s busy schedule.
    Tenant A decides they can’t live that much in a house with no regular hot water, and, since it’s their 11th month in, they announce to the landlord that they will leave. They drop the keys, but some luggage is left and the house is not cleaned at all.
    Now the landlord has gone through a 350 pound investment, needs to purchase an entirely new boiler, needs to collect a month’s worth of deposit and has to deal with the mess and the leftover luggage.

    A new boiler is somewhere between 500 and 2500 pounds, but let’s say it’s 650, so it makes math easier. This totals on a 1000 pounds of investment only for the boiler issues.

    Then there is another 1000 pounds, which he can dispute in the courts, but because of the maintenance issues, those are not 100% guaranteed, and he further has to pay solicitor and court application fees.

    He might get them from the 1000 pound deposit that the tenant has left, but he also needs to hire end of tenancy cleaning and rubbish removals to take care of the property and return it back to presentable and marketable state.

    That’s another 200 pounds and now he needs a new tenant so every day the apartment stays empty, he loses money.

    So all in all, after all this trouble, you’re down around 1500 pounds with all taxes and services included, and you need to put somebody in the property asap, so it’s time for agents and agencies and then submission and administration fees and you’ve lost as much as 2000 pounds, excluding your own time, efforts and stress, all while you continue to pay mortgage.

    Of course, that doesn’t happen that often, but every long term landlord has or will experience a similar case in the timeline of their business.

    I’m sure the tenancy vs mortgage question will continue to be disputed for a long time. Even I’m not sure which is which and what is better. Somehow, renting seems like a safer option, if you don’t have a considerable capital behind your back or at least a position that allows you to save money constantly and create financial margins for cases like the one I described.

    Anyway, good discussion, all the best.

  • 37 Jack Sim December 16, 2015, 2:28 am

    I write because whilst I fully appreciate the notions raised. Most of them are alien to a large percentage of our population. Me included. And only relevant to us in the way they reflect the commoditised housing market – one which penalises those who don’t commoditise it.
    I seek uncommoditised housing and have it.
    I live in a shared room in New Cross, with 3 others, paying £130 pcm inclusive. With many other people in our house. We manage the property as a housing co-op.
    It might sound horrific to others. To us it’s perfect, affordable, friendly, fun, supportive, bills are much much cheaper, we CAN put nails in the wall where we want, we are our own landlord, but we don’t put the deposit in directly. And we pay much much less, since neither we, nor a landlord are involved in taking any profit.
    So the rest of our income is free to invest how we want – in homes, in shares, or mostly just for living (since we mostly earn below £6-7 each, but do get a lots of time and that’s plenty enough for us to live a luxurious life).
    Housing for us is simply that: a home, and not a commoditised opportunity to increase income, income comes from work, savings are low but useful for laptops, instruments, home improvements, studying, and train tickets.
    There is an investment – for us it’s social – people and organisations who’ll support and care for us if & when we need it and provide a place when we need it through ill health, or after traveling etc…
    It is also a social investment, as every hour of labour I put into the building, or everything we buy for the building, stays with the building for whomever moves there. We also have security of tenure closer to an ‘owner’ than an insecure tenant. Unlike social housing, our company owns the property. Our housing network (which we run voluntarily) licenses, leases, buys or builds new properties. We are part of a growing national network of co-ops and we are starting a scheme to be able to transfer between them.
    My main point is that inbetween ‘institutionalised’ social housing, and commoditised private housing (whether renting a mortgage from a bank, or renting via a private landlord) there lies an alternative uncommoditised form of ‘ownership’, which still leverages properties, but purely for restraining housing costs and providing housing.

  • 38 James September 6, 2018, 6:36 am

    One thing I just want to add to the conversation: a lot of people say that they feel owning a property would tie them to a specific location, thus limiting their freedom of movement.

    This is a silly fear, one can always rent their property. If they have purchased carefully and paid a sensible price, then their rents should cover their mortgage expenses.

  • 39 Rich July 1, 2023, 1:49 pm

Leave a Comment