You’re too late to get into buy-to-let. It had a good run, but the party’s over.
I graduated from university in the early 1990s. I got a job in The City, moved down to London, and shared a rented house with a few friends.
After a year of renting – and spurred on by a combination of parental pressure, MIRAS1, and (ludicrously) a mortgage interest subsidy from my employer – I bought a house.
Did I have a big inheritance? No. I saved up for the deposit in my first year of work.
Okay, that’s not actually quite true. I also had some profits from punting my student loan on the stock market, the proceeds of a systematic building society carpet-bagging operation, and a well-timed cash withdrawal on my credit card.
Combined this took me over the line into buying my own house.
And yes, I do mean a house – as opposed to a flat, let alone a bedsit.
My deposit plus salary secured a three-bedroom, freehold house with a garden and garage, in Zone 1, 30 minutes walk from my job in the City.
Even I cringe a bit as I write this. Sorry, millennials.
I paid £130,000 for this house and spent the autumn weekends decorating it to the incessant radio play of Whigfield’s Saturday Night.
Then, for a while, I just couldn’t get enough of the things.
My property portfolio balloons
I got my first ‘proper’ bonus (two figures!) soon after I bought that first property.
While my colleagues were spending their windfalls in Clerkenwell dives doing shots from lap-dancers’ bellybuttons, I was at home eating toast, reading about newly-launched buy-to-let mortgages, and perusing the property section of the Evening Standard.
And so, barely two years after buying my first house, I bought a second.
This one was an ex-local authority three-to-four bedroom property. I picked it up for £75,000. After a lick-of-paint I let it out for £600 a month.
That’s a starting gross yield of nearly 10%.
Soon afterwards, newly married, I left London for a pointless dormitory town in the commuter belt. I moved into a house I bought with my wife, for which I paid – cough – less than I earned that year.
And of course I kept my original home in London to let out.
Because why would I not?
Buy-to-let boom
In those open and liberal Blair years London was booming. As the de facto financial capital of the European Union, it sucked in talent and money from all over the world.
From American investment bankers and French derivatives traders to Polish plumbers and Italian waiters, everyone wanted to be in London.
Which meant London property prices were going through the roof:
Shortly after leaving London, I bought three more properties in a single year. My wife still reminds me of the time I went out for a newspaper one Saturday morning and came back with a two-bedroom flat.
By this time I’d worked it out. I raised equity against my steadily appreciating London properties for a deposit on the local ones. This way I put no money down.
It was like I’d discovered a perpetual money machine!
Only… the machine started to sputter a bit. The problem was that while house prices kept going up, rents did not. Starting yields were decreasing.
This was largely a story of falling interest rates. Property was like a very long duration lightly-inflation-linked bond. Prices moved accordingly.
The landlord game was also getting more competitive because more people were doing it.
Buy-to-let had become… a thing.
Too late to get into buy-to-let for big bucks
You know the old adage that an optimist is someone without much experience?
Well, that was me.
I started out on my property ‘journey’ as YouTube pundits call it by guessing that my costs would be about 10% of the rent. That wasn’t far off, to begin with.
But as rents increased more slowly than my expenses, the economics got steadily worse.
Then there’s the ‘exceptional’ costs that nobody warns you about. Or, if they do, you don’t think they’ll happen to you.
What sort of expenses? This sort of thing:
Double-crossing agent
The agent for a London property reports the tenants aren’t paying the rent. Letters and threats of legal action are (supposedly) sent to the tenants. Rent is received sporadically over the next couple of years. It turned out the tenants were paying the rent all along. The agent kept it himself. Agent declares bankruptcy, directors leave the country. Loss to me? About £18,000.
Shit happens
Tenant moves in, pays deposit and the first month’s rent. Never pays a penny more. Takes 14 months to get them out of my property through the courts. On taking possession I find their dog has eaten all of the internal woodwork. And when I say all, I mean all: doors, skirting, architrave, even the window sills. The back garden had been destroyed. It was like some combination of a First World War trench and 14 months worth of dog shit. I still wake up in a cold sweat, thinking about that day I spent in a HazMat suit digging out two-foot of shit to replace it with topsoil. Loss to me? About £15,000 (not including sleepless nights).
Size matters
That first rental I bought in London, which I’d always let to three sharers, is suddenly designated a ‘HMO’ by the local authority. (It’s not). So obviously I have to pay them £500 and spend several hours filling in pointless forms. Oh, and I can only let it to two people now – because of some arcane bedroom size restrictions. (Ironically it was the local authority that built this property…) Perpetual rental income reduced by a third. It’s hard to quantify the loss here – what discount rate to use? It’s a lot, anyway.
Party walls
My personal favorite – not because of the cost, but because of the timing. A builder is completely refurbishing a London property for me. It’s a big job, including moving walls and bathrooms and so on. Randomly I get a bill, in the post, from the police, for something like £300. They’ve attended an ‘incident’ at the property. Turns out that unbeknownst to me the builder’s laborers had been sleeping on-site. They’d got drunk one night, had a fight, and the police were called. When did this bill arrive? I think you can guess – the day after I’d paid the builder his final payment.
Once you factor this sort of thing in, along with the more regular stuff – the boilers, the double-glazing, the roof replacement, the damp that just WILL NOT go away – my 10% expense estimate was hopelessly naive.
Too late to get into buy-to-let – and too much hassle
I can now look back at more than 25 years of accounts from my modest buy-to-let empire. Starting with one property, with seven at the peak and with three remaining today.
Which means I can tell you, exactly, how much the non-interest costs were as a fraction of the rent:
31.4%!
Call it a third. Wow.
I do use agents to fully manage the properties, and they are expensive. But I will not be being phoned in the middle because of a blocked toilet. Not when I’m working 16 hours a day at an investment bank. (Okay, I don’t do that anymore, but I’m still not going to field those calls).
And this is why it is too late to get into buy-to-let. Along with falling rental yields, the trend in costs is only rising.
There have been lots rule changes over the years that have made things worse:
- Higher CGT rates
- Abolition of the Indexation allowance
- The pointless requirement to pay CGT outside of the tax-year cycle
- Annual Tax on Enveloped Dwellings (ATED)
- Extra stamp duty
- Elimination of the wear-and-tear allowance
- Deposit protection schemes
- Tenant fee ban
- Section 24 (tax on rental turnover not profits)
- The PRA’s CP11/16 (which means you can’t borrow as easily)
- Arbitrary and retrospective ‘HMO’ rules
- All-sorts of safety and environmental regulations
- So called ‘right-to-rent’ law that compels landlords to be a tool for the government’s cruel and damaging immigration policies
That was all off the top of my head – I didn’t even need to consult a list.
Now, don’t get me wrong. In isolation there’s nothing inherently wrong with most these rules (the exception being the last one) and the health and safety aspects are especially reasonable.
But the mood music is pretty clear. The government believes it can impose these costs on landlords because we are all loaded.
It’s not 1994 anymore
How loaded?
The average gross yield on my property portfolio is now – checks notes – 3.4%. Which implies that the long-run post-cost (excluding financing) yield is about 2.3%.
That is… not enough. Especially as there’s no tax shelter.
My property portfolio has been an enormous accelerator of my wealth over the years. But the easy times are over. My success came about almost completely as a result of falling interest rates.
I simply got leveraged lucky.
Some newcomers may try to make the maths work by getting into buy-to-let via a limited company or whatnot. I’d question whether it’s worth the hassle. In my view it’s too late to get into buy-to-let to make a killing. It’s not 1994 anymore.
Whigfield is more likely to have another global hit than you are to get rich investing in property at today’s starting yields. “Da ba da dan dee dee dee da nee na na na” indeed.
If you enjoyed this, follow Finumus on Twitter or read his other articles for Monevator.
- Mortgage Interest Relief At Source, a defunct tax relief scheme to encourage home ownership in the UK. [↩]
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Exactly why I’ll never own rental real estate. Even though it is much less onerous on this side of the ocean, buying rental property is still just a way of buying a second job. Its actually a little worse than that in my opinion because in addition to all the extra work you also stand a fair chance of losing your investment if you are using leverage to buy the properties. I think it only makes sense if it feels like a hobby to you, it didn’t feel that way to me when I tried it. It has been the path to wealth for many, can’t argue that, but I enough wealth without the hassle real estate involves.
Interesting article today thanks. Was made an accidental landlord 12 years ago and it has done very well for me – nothing on the grand scale discussed above however. Now at a point where I would quite like to sell it for similar reasons discussed but it is home to the person renting it so reluctant to sell for that reason. Far too much of a softie to be a hard nosed landlord!
One of the (many) things that would put me off buy to let, is what happens when a tenant rings the management company with what turns out to be a trivial problem. The management company sends out a plumber, electrician or handyman, who sorts the problem in 5 minutes and you get billed for whatever hourly rate the management company has agreed with it’s team of “trusted” trades people.
It hasn’t cost the tenant anything, it’s easy money for the electrician, plumber or handyman and the management company doesn’t care as they may be taking a slice of the fee anyway. As the owner, you’re the one being taken for a ride and you may be none the wiser as to the true cost of the problem.
You were very lucky with your entry timing (i.e. being born at the right time) and very unlucky with your tenants and builders.
@john
im in similar position as you
i part owned and part inherited my dads small bungalow.
I have a good tennant . a man on his own who wants to stay a long time.
I dumped the management company cos its too expensive and i dont mind responding to whats comes up to do.
sometimes i think id prefer to sell but its his home , not an index fund.!
when the march 2020 market crash happened i felt very safe i had other income sources so the diversification it offers is my reason to hold on.
im getting about a 4.5% yeild from it .
@willy – This is exactly what happens, you’ll get a £100 bill because the tenant doesn’t know how to change a light bulb.
@john and @dawn – Yes, I sympathise, I’m selling my portfolio, but I always wait for vacancy before I sell. You can get lucky with tenants – I’ve had one tenant 15 years, she’s always paid her rent on time, and I’ve never raised her rent.
I always hear about these landlords who don’t raise the rent for good tenants, never found one in 20 years. Never missed a payment and my rent is probably going to go up 5-10% later this year (to be somewhat fair, it didn’t increase at the renewal last year during covid).
@Finimus is BTL still worth it for the appreciation, ignoring yield? With capital gains surpassing salaries lately, it’s got to be a factor.
@Learner. Is is still worth it for capital appreciation? Who knows? There are really only three drivers: interest rates, credit conditions, and wage growth. (Immigration and house building don’t really move the needle) Interest rates can’t fall much further, I doubt we’ll have a loosening of credit conditions, wage growth – maybe we have a productivity surge? But taxes will likely rise. So most of those indicators would suggest that there’s more appreciation behind us than ahead – at least IMHO. Although…. I’ve thought this for years 🙂
Great article, agree potluck with the tenant & overregulated. Would be interested to hear your views on holiday let’s & Air bnb which still have some tax reliefs. Thanks
The house next to us with a very large garden was repossessed. We’d been worried for a long time as agents had been making offers for the back garden and the owner was trying to rope in two old ladies who lived next door as well.
We decided to try and buy it (a nightmare) and acquired the property just before the market crash in 2017 (£430,000). We then had to rebuild half the house (£35,000). However we have let the house to the same family all this time (av £24,000 pa). We ‘sold’ ourselves most of the rear garden and the value of the property has now exceeded £800,000
The downsides?
New appliances, a few leaks from the shower into the garage below and new fences. The tenants are moving out to the USA soon and we’e already have a new tenant in place. I manage the property myself, pretty easy as it’s next door.
So my ‘profit’ is about £335,000 with an ongoing rental stream. We were able to buy the house with available cash from my business. The only snag now if the house is registered to the Ltd company (family owned).
All in all I’m very happy we made this investment, but when the markets crashed at the start I admit I had some nervous moments
BTL is an area that perplexes me. I have been a landlord for many years (but also only stopped being a tenant very recently) and being a landlord is great when things are going well, but is horrible when they’re not.
High rental yields are still available in specific pockets of specific towns and there’s always the temptation to invest. This is in the North East, where house prices are still below the 2007/8 peak (but appear to have boomed 20%, similar to places in the South East I know well, following Sunak’s latest interference).
But the regulatory wind has turned against the small guy – a trend of this govt in many areas…but that’s a different topic – and you never know when the next BTL tax grab / regulations will land.
The popular narrative is that landlords are all multi-millionaires bathing in champagne who are solely responsible for the house price boom (but usually no mention of NIRP and QE in this narrative). Therefore BTL is an easy target.
Tax and regulatory risk aside, BTL is the only way for the average person to leverage their cash and is also a hedge against inflation.
Hence a quandary whether to buy more or try and find an alternative to provide an income and track inflation. There’s no right answer, obviously, it comes down to personal opinion and risk.
@Learner — Before I finally bought my flat (well into my 40s!) I house-shared the same place with a best friend for just over 10 years. We were great tenants, and our landlord only put the rent up once in all that time. We were probably paying high-end at the start and the house was getting a bit shabby by the end, but still it worked for all of us. He even let me stay on a rolling one-month gentleman’s agreement while my property hunt and purchase went through at the end. And we got all our deposit back.
I’ve had a mix of good and bad landlords, but more good to be honest. Perhaps helps that I did used to partly select for what seemed like decent arrangements rather than bargain basement prices, but maybe I was just lucky. 🙂
It definitely slowed down my impetus to buy my own place, however, so in that sense good landlords probably cost me tens if not hundreds of thousands of lost property gains haha.
@Learner – I am one of those ones that doesnt put the rent up. Small price to pay for knowing that the place is in good hands. Though will undoubtedly extend the tenancy as they would struggle to get somewhere else for a similar price.
@dawn – your position sounds very similar to myself. Have pretty much no mortgage left so contemplating releasing some equity to invest it but just weighing that up against then losing the flexibility to sell it without having a mortgage tie in. Either way, tt is a fortunate position to be in
Is investing in a stock market index tracker be more profitable than buy-to-let?
Great article. The streets of BTL-land haven’t been paved with gold for a good while now….
The biggie for me at the moment is regulatory change. I’m in Wales and I’m finding the legislation due to come in next year frankly terrifying:
Landlords to give 6 months’ notice, not to be served in the first 6 months? Guess I’ll have to be even tighter on vetting prospective tenants then, and I won’t be in a position to “give people a chance” (which is a shame – I guess I won’t be contributing much to the government’s noble aim of making the lettings market better for tenants).
Joint tenants can give notice and walk away without it ending the contract? Looks like I won’t be taking any joint tenants from next year then unless they could both individually afford the rent….
The list goes on…..
Thankfully I should be OK if the minimum EPC goes from E to C in a few years’ time as the jungle drums seem to be suggesting.
It’s never ending and the big question is at what point does it all tip the figures from “not great” to “just sell up now and walk away”?
Imagine the rush for BTL when government cuts the tax relief on pension contributions as rumoured!
I always increase rent to market rates.
Tenants don’t like it they may vacate.
In 13 years only two ever did.
Replaced them easily with higher rents.
NOBODY has mentioned the singular biggest issue in the BTL game.
When tenants are complying with their TA then things are great.
But have a rent defaulting tenant that needs to be removed is a nightmare.
Inability to repossess from a rent defaulting tenant is a massive risk to a LL.
If the LL has no RGI on the tenant or a guarantor then the LL is on their own.
They would need to be able to pay a mortgage without rent for about two years plus have sufficient resources to refurbish once the tenant has been evicted.
Most feckless rent defaulting tenants leave the day before a bailiff is due to evict the tenant.
A LL without RGI has to fet the tenant right everytime.
I have been teetering on the edge of bankruptcy.
Had any of my occupants defaulted on rent I couldn’t have serviced the mortgage debt.
It is for this reason alone that despite making good profits I intend to sell up ASAP.
I simply CANNOT face the bankruptcy threat every month waiting to see that rent is being paid.
If you can obtain RGI on tenants or on a guarantor then I would say you are pretty much bulletproof even to long repossession periods.
Only one of my occupants was ever able to qualify for RGI and she cost the RGI company £10000 when she defaulted on rent!!!
Without RGI a LL has to bear alk the costs of repossession.
Very few tenants qualify for RGI.
It is a fact that most tenants are low quality such that they will hardly ever qualify for RGI.
With the AST and S21 being abolished soon it will be made even more difficult for LL to achieve repossession from feckless rent defaulting tenants.
It is the repossession issue that is the major threat to BTL viability.
BTL is great when tenants pay their rent.
It becomes a nightmare when they don’t.
There will be many LL that will sell up once they have evicted their feckless rent defaulting tenants.
.LL have been badly burnt by feckless tenants this pandemic.
They will have decided to leave the AST sector.
It is no wonder many are turning to FHL and SA where there are NOT subject to the stupid repossession regulations.
Govts of all persuasions still haven’t learnt that if you make it difficult for LL to repossess their properties from feckless rent defaulting tenants then LL will naturally turn to more viable and profitable forms of tenure like FHL or SA.
Feckless rent defaulting tenants cause LL £9 billion of losses every tax year.
This out of about £18 billion in total rental income.
Rarely do LL every manage to recover any of these losses.
BTL is over due to the difficulty now of repossession.
A great shame.
Now many LL are choosing to let on other forms of tenure that don’t involve the AST.
Indeed I believe it has bern reported that in the West Country there are over 10500 AirBnB vacancies but only 62 properties available for AST letting!!!
It is no surprise LL have moved out of AST lettings.
With AirBnB a LL doesn’t have to wait 2 years to repossess their property from a feckless rent defaulting tenant!
AirBnB ISN’T of course guaranteed rent but that is also the case with AST tenants who like to rent default.
BTL for most LL is dead.
Move to SA and FHL.
Forget AST letting far too risky.
@Paul Barrett – Actually, I did mention this in the article, exactly this happened to me. Took me 14 months to get possession, no rent, lots of damage and they indeed waited till the day before the bailiffs arrived. What can you do? Invest in something else…. my emerging market bonds default less often than my tenants – and they never call me in the middle of the night about a blocked toilet either.
The Investor who wrote this article made a key mistake in his portfolio journey by not managing his own properties. I have started only 3 years ago and acquired 4. I have brilliant tenants. How? I do my own viewings and make thorough checks on them and interview typically 20 candidates. The Investor did not want to deal with the tenants and thats where I think he went wrong and led to his high costs. Also, in todays market buying in London is not worth it for BTL. Its all outside the capital now. I live in London have 1 in Essex and 3 in Scotland- equity in each region is going up (i bought under market value in todays worth) its affordable to buy more property and there’s loads of towns and cities to buy.
2/2 plus there’s still developer opportunities out there to make good money. I bought a 1 bed cottage 3 years ago in Scotland i have planning permission on it to turn it into a 3 bed cottage to bring a value of between 160-180k on completion. (Extension to cost 20k) I’m a higher rate tax payer. The recent tax additions have made it difficult to acquire further additions but with smart thinking they are still out there.
This was an interesting piece, I found myself nodding along in agreement to much of it.
My property investing journey is similar to that of Finumus, though fortunately without quite so much drama. I’m experiencing similar numbers and have reached a similar conclusion.
A long term factor I puzzle over (particularly for London) is one of demographics. Upwards price pressure relies upon demand outstripping supply. Yet with birth rates low, migration politically unpalatable, and the pandemic hastening the existing remote/shared working arrangements trend it raises a question about where the next generation of greater fools will come from?
I had 5 BTL 3 years ago and now down to 3.
I’ve had a pretty lucky run – holding >1 property when interest rate fell was pure luck. Doing it Leveraged even sweeter/luckier. Very much akin to timing the market and stock picking (which I’ve been less lucky at).
Once leverage/mortgages are removed BTL became a tougher sell v FTSE100 yield or 6%+ from preference shares (I know should have been in world trackers!)
On another note having family members as tenants is good and bad – haven’t increased rent for 16 years on one (market +50%)…
My historical records aren’t great but my net worth (decent FIRE) has been approx – 1/3 DB pension, 1/3 property, 1/3 sipp&savings
B
Ps
I bought my first house in 1998 valuation £50k, a few years earlier similar properties were touching £80k – hard to imagine the ramifications of a similar crash today
Trying very, very, very hard not to say….
Ah well, oh dear, never mi….
( Renter)
Always love Finumus’s posts (that ISA trick one on their own blog was absolutely genius) in part because they reveal a completely different world. Much more tolerance for risk, much higher reward – and a clear bent for the field of making money and a deftness of writing that brings me – with rather different experiences – along for the journey.
Have very mixed feelings about BTL. I lived in some very shabby places, at usually very low rents with often crap landlords, for years – and it helped me become financially independent in my early 40s. But it’s been a scourge on the housing market – massively reducing the amount of supply and driving up prices in some areas. Then there’s the term “Landlord” – it seems to bring out the worst in people – no wonder many tenants are resentful. How much better might it be to have a less loaded term like the housing equivalent of a shopkeeper or retailer – housing provider? There’s an asymmetric power balance here – especially at the lower end of the market where some are financially crippled by every move they have to make at the whim of landlords or their agents (who benefit from the churn).
Things have got better eg the TDS. But even here three of my landlords simply didn’t bother with it. One gave us notice immediately, the second immediately returned our deposit and the third just kept it – rightly judging that given we were both too ill and exhausted to challenge it.
For something so crucial to progress on Maslow’s hierarchy of needs – there has to be a better way of providing people with a comfortable secure home in a first world country than the current expensive and often poor experiences.
Property is all about leverage, and while you can argue BTL is dead (due to hassle and costs) residential property still seems like a good investment for *owner occupiers*, even at today’s crazy prices.
If you take a £560,000 mortgage on a £700,000 property @ 1.9% fixed for 5 years. – monthly payments come in at ~£2,500/mo and after 5 years (assuming property prices stagnate and remain flat) you’ll have ~£90K in additional equity.
Let’s say you can rent an identical property at £1800/mo and invest the difference of ~£700/mo over 5 years. You’d need a massive 30% annualized return to reach £90K.
If i were investing in a second property as an investment I’d certainly look in to the Ltd company route and renting to say, my own grown children as a way of benefiting from leverage while keeping wealth within the family.
^
I forgot to factor in the £140K deposit of course but even with that invested as a lump sum, in addition to the £700/mo you’d need still 5%/yr to reach £230K in total equity, can you say for certainty that stocks would deliver this with less stress?
@Andrew: You write:
I can confirm it is a nightmare to try to keep up with leveraged property via investing returns. For various reasons much documented on this blog, I tried to do this between 1998 and 2018 and despite turning myself into a investing-obsessed mini-Warren Buffett with very decent returns who monitors money and investing enough to create a very popular blog about it, I probably *still* would have done better to buy the most expensive flat I could afford in London in 1998 and then got on with life.
Of course London prices roared away over that period, so things were far worse than your example. But people who’ve bought early and dismiss their gains with “you have to live somewhere” utterly miss the point and should do the maths (especially before lecturing young people to stop “whining” about unaffordable property today).
Good for them and my screw-ups were on me, when it comes to my situation, though. 🙂
A leveraged residential property is a dream investment for 95% of people. Maybe more. You need extremely good reasons to rent instead.
(My dad was right and I was wrong. If you can hear me dad, you won! 😉 )
@Robert Hearns – I’m fascinated by the “You need to manage them yourself” example, that has you living in London with your properties in Scotland.
How? That’s one hell of a round trip to bleed the radiators or whatever.
@Andrew + @TheInvestor – I agree that owner occupied housing has been (and might still be) a good deal – inexpensive leverage, enforced saving and big tax breaks (no income tax on imputed rent, no CGT). But it’s still largely been a story of falling interest rates. Plus people massively under-estimate maintenance costs, because they don’t really account for them.
@Finumus — I haven’t done the maths half-properly for a few years, but I am sure that if I’d bought one of the two-bed flats I looked at in the mid-to-late 1990s in say Clapham and lazily assume that ongoing mortgage costs plus maintenance = cost of rent (I suspect buying would have been much cheaper on a cash flow basis, due as you say to low interest rates in the past decade or so) then my gut says I’d have needed at least Buffett-level returns from investing to keep up with a 75% loan-to-value mortgage.
Which is quite an ask versus sitting on your couch eating pizza with occasional drinking trips to The Sun in the-then fast-gentrifying Old Town. (And of course you could have started being a mini-Buffett, too, a few years later as you rebuilt your investable warchest).
Perhaps it’d make a good article sometime, actually. 🙂
Of course prices can’t go up 10-fold again over the next two decades. Can they? 😉
All great points, enjoyed the post as usual!
Our property investments stateside have done very well for us (and hence we are looking to add more) but the picture is quite different here in the UK.
The big question is whether there is another, equally democratic way, for today’s millennials to build wealth on a similar scale.
BTL, while potentially still attractive in certain pockets of the country, is clearly not what it used to be anymore.
@willy @Finumus
I have a rental property but also work for an electrician who deals with many letting agents, so I have experience with both sides of the coin. I find a lot of people assume tradesmen and letting agents are in on some big price-fix together, but it’s not the case. Or at least not in my medium-sized market town, anyway. The letting agent/landlord gets charged exactly the same rates as our regular customers and we’ve never been asked or expected to charge anything different.
The one exception was a few years ago when a cheeky big letting agent decided to start taking 10% of our invoice value, meaning we were expected to do work for 10% less than our usual rates. Other letting agents then followed, which mainly meant that letting agents dropped to the bottom of everyone’s priority list, because with how busy most decent trades are we didn’t need to be taking emergency callouts for more hassle and less money. Subsequently, most trades then had to hike prices for letting agents just to make the same margin, meaning that the end landlord was paying the agent a 10-15% management fee for the privilege of either receiving more expensive work invoices or a long delay in getting their job done.
That lasted for a year or so before the 10% ‘arrangement fee’ was quietly dropped by the agent and we went back to billing normally, so I assume that some observant landlords found out they were essentially being double-charged and raked the agents over the coals.
Working for letting agents is definitely not money-for-nothing though. I could probably write a whole Monevator post for landlords about what happens at this end and how to save money. Crikey, have we got some nightmare landlord/tenant tales to tell…
How about buying ground rent freeholds? I read they make approx 5% a year or at least funds that do them seem to make that, possibly you could leverage them but to me that’d feel about as safe as leveraging mortgage backed securities felt before the GFC. Anyway a freeholder of leaseholds isn’t on the hook for costs (or at least can redeem them), and very rarely has to deal with defaults. But again you have an illiquid, interest rate sensitive bond analogue that still requires paperwork – paperwork you can charge for, but that depends on what you’re prepared to work for. My old freeholder (used to call freeloader) tried to top up my lease to 99 years rather than add 90 years as a statutory lease extension would do, and they tried to have ground rent doubling every 10 years, but I got a peppercorn by applying to the tribunal to force a statutory extension, and that better extension didn’t cost much more. The surveyor and conveyancer didn’t care about me getting a good deal and kept advising me to take any offer, but glad I didn’t! Freeloader would’ve pinched the pennys from the eyes of a dead person, but anyway, this is an option we could do! Still would probably have better reward for your risk with a 60:40 though.
P.s. Bill gates is a philandering philanthropist!
Anyone who thinks letting agents aren’t ripping landlords off should read about the case that Lynn Faulds Wood and her husband John Stapleton brought against Foxtons in 2015:
https://propertyindustryeye.com/law-firm-takes-to-twitter-to-recruit-landlords-in-case-against-foxtons/
I assume this particular case was settled out of court.
In the City where I live I’ve heard a lot of anecdotal evidence that the practice is still widespread. How else would letting agents still make a living now that fees charged to tenants have been banned?
I started in BTL in 2013 after being made redundant in my 50s. Initially I had to buy without mortgages. It has worked for me and still works, but I am in the North and we use a different strategy. Instead of rely on capital growth for our profits we rely on rents. I look for a minimum gross yield of 7% and most years achieve over 8% average net yield, though it dropped to 6% last year. That includes paying for full management by letting agents.
Mostly I am not trying to build wealth from BTL but to provide an income for myself, from wealth I had built by saving and an inheritance. An income that does not require much work.
When I started buying prices were still lower than in 2007 and didn’t increase much for 4 years though more recently Manchester’s boom has reached the area. But that is just a bonus.
I have this year raised the rent for a tenant for the first time, after she had been in the property for seven years.
I have had one bad tenant who cost me £10k in lost rent and repairs.
As for prices going up 10 fold in 2 decades they haven’t around here. At the start of the century you could buy 2 bed houses in the area for £18k, but they would be un modernized ones still with outside toilets. Now the cheapest is about £80k, nearly 5 times higher, but a higher standard.
@Peter — Re: House prices going up ten-fold, I guess it was closer to 25 years and not every property went up so much. But just to give you a flavour:
https://www.home.co.uk/guides/house_prices_report.htm?location=clapham&all=1
Imagine trying to chase that boom (initially with cash savings!)
Not pretty. Not smart either haha.
> Of course prices can’t go up 10-fold again over the next two decades. Can they?
Hahaha *sobs*
I have thoughts but would rapidly veer off topic. Superb post, Finumus.
> Of course prices can’t go up 10-fold again over the next two decades. Can they?
Unless banks start offering negative interest rates, and _paying us_ to take out mortgages, I don’t see how this is possible.
The price deflation / rate increase scenario is an interesting one to throw numbers at though…
If you take out a £300K mortgage today fixed at 2.5% then when it comes time to remortgage you’ll have £50K of additional equity. But what happens if that new equity has been erased by a fall in house prices and you can only remortgage your £250K of debt at 4.25%? Your monthly payments remain the same.
Maybe I’m missing something, but it seems to there’s definitely room for rates to go up and house prices to fall without millions of subprime delinquencies .
[Also hands up if you hit up YouTube to listen to ‘Saturday Night’ after reading this post?]
Very good article, I know it was originally on the finumus site but well worth a re-read for the comments.
I’ve got a few buy to lets that are now on very low leverage. I try to be the model landlord and so far it’s paid off. One tenant does some repairs themselves and looks out for the block. One tenant has been there for years. Maybe I’ve just been lucky. But I’ve had some very time consuming maintenance issues too. I’ve never raised the rent unless a tenant moves out. But I agree with the contents of the article. The dynamics are not attractive any more.
@19 Robert Hearns – How do you do all the interviews yourself in Scotland if you are based in London. Am genuinely trying to understand!
But…I’ve been agonising this week over maybe buying another buy to let – 100% mortgage through releasing capital on my primary residence….Why? It’s a fairly minimal part of the overall net worth so if it goes wrong it’s not a disaster but primarily because you can get a 7 year fix interest only at 1 and a bit %.
The asset isn’t attractive but the financing is! The alternative is to stick that into equities or something else.
So what else…….?! Answers on a post card very welcome!
Well saying that we had a lot of capital gain in the past might be a bit misleading because expectations for the interest rates upon the leverage was generally higher back then, how much of that gain did they lose to interest? Granted there has been more of a free lunch lately with good growth on cheap credit but it wasn’t always the case. We might have inflation in the future but if it’s accompanied by higher rates we’ll be somewhat cancelled out, like with bonds.
I was reading that UK house prices were a higher multiple of income before WW1, and that it wasn’t just housebuilding but also increases in wages – property at least is not fixed income so unlike bonds you can at least improve P/E by improving E without harming P – at least it’s path back to higher rates could potentially be less painful. Still though I can’t imagine the same rate of growth.
Negative mortgages could have positive fees as a way to introduce them in if they came – like the opposite of getting cashback for a mortgage with a positive rate. As a borrower you would be providing a safe storage and diversity for the lender and helping them meet any obligations they have to appear to be lending. Also the banks might offer negative rates just to support their existing lenders – they don’t want negative equity defaults from a housing crash, they as a group might pump money in to keep the market afloat knowing that as a group they’d also receive the proceeds of sales as deposits too. The government too might do funding for lending QE again, maybe even at negative rates to the banks on the condition that banks lend just to avoid a crash like the GFC.
A negative base rate would make cheap storage an attraction too.
@The Investor Sorry I wasn’t clear. I was trying to emphasize that the market where I have invested is very different from London’s. Less capital growth but better yield. At least it was when I started. Now it is giving both. The OP’s conclusion is wrong for my local market. It is not a good idea to generalize from a particular example, especially when it is an especially peculiar one.
Not that my local market (Tameside) is without it’s quirks but I understand them better, e.g. prices for the cheapest properties almost doubled in the years following the completion of the M60 as it took 20 minutes off the time to get to almost anywhere south of Manchester.
Industrial buildings can be very attractive, tenant pays to maintain and insure, long leases, yields are high. Capital returns are not dramatic but 9% or 10% yield is great…
Great article and I love the detail that you went into.
You’ve shown that the returns are low percentages for the asset values, but they were large asset values.
For me, the temptation for buy to let property investment is the leveraging opportunity. Would a bank lend me £500k to invest in a low cost index tracker?
@Andrew – I’m not sure the maths are as compelling as you suggest for owner-occupiers. I’m certainly not an expert and can fall on either side of the debate, but it does seem that the giddiness around property ownership (I live in Oz it is a lot worse here…) leads to a lack of clarity when looking at the facts, especially when many of the costs of home ownership are lumpy one-offs.
In your example you’re right that over 5 years (purchase of £700k w. 80% mortgage 25y @1.9%) our owner socks away another £90k in equity and pays approx £48k in interest. However that on its own overlooks a number of the costs of home ownership that the renter won’t bear:
1 Transaction costs – stamp duty (in normal times excluding covid holiday) is £25k on a £700k house, so our owner has to cough up for that. You’ve also got your surveys/conveyancing but let’s ignore for now. Plus agent commission on the way out – maybe 2% (total guess), but let’s forget that for the 5-year horizon.
2 Building insurance – moneysupermarket suggests that this is £110pm for the average house in the UK (£250k) = 0.5% p.a. Seems a bit high so let’s say 0.3% p.a. = £2,100 = £10,500 over 5 years
3 Maintenance – rough rule of thumb is about 1% p.a. but of course this is lumpy = £35,000 over 5 years. Note that this doesn’t account for “true” depreciation of the building which can’t be avoided (obsolescence), which is a long-term cost so let’s ignore over 5 years.
4 I am sure i have missed some others…
Over 5 years our owner has paid ~£70k in irrecoverable costs, before finance. Add in the interest costs of £48k and we’re up to £118k.
On the other hand our renter has paid ~£113k (assuming starting rent of £1,800pm and an increase of 2.5% p.a.). The rental yield is 3.1% which seems reasonable in today’s market I think?
If our renter starts by investing the £165k (deposit plus stamp duty) plus over the next 5 years they would invest £90k (owner’s equity contributions) plus the extra £5k saved, less the £25k for stamp duty (we’ve already counted it) = £70k = £1,1167 pm. Assume we are good passive investors and have OCF + account fees + brokerage of 0.5% then contributions alone in the 5 years come to just over £230k after fees.
You can argue the CGT both ways (ISA etc) but in this case the renter is slightly ahead at 5 years, without any capital growth/divis and assuming no fees on sale for the owner.
Now of course the mortgage makes it such that the share portfolio has to work harder to match the performance of the levered property, but there’s nothing stopping the renter going off and doing the same by borrowing on margin. They won’t get the same LTV (at least for the early part of the mortgage) but the option is available.
All of which is to say that it’s not obvious to me that owning property is this fantastic gravy train that it is often made out to be. And all the while the property owner bears all sorts of “hidden” risks that the renter doesn’t – no diversification, no liquidity, leverage, lumpiness of cashflows, lack of optionality (general life optionality) etc.
Clearly (final point) there is also a human side to this – and if you like it then buy it – absolutely nothing wrong with that. But purely on the numbers it’s not so obvious, even with rates as low as they are today.
Cheers
Alex
@Alex
Circa 60% of Uk houses are below the £250k stamp duty threshold.
Average UK estate agent fees 1.2% + vat
Building insurance – MSM figure of £110 was per annum (which does sound low) – £6/10k not realistic UK figure
Maintenance, upgrades, depreciation(lower appreciation) due to unpopularity of old construction etc – all real and tough to estimate
Agree it’s not clear cut, and I wouldn’t like to start from today’s position.
B
I’ve never wanted to be a BTL landlord, but other family members have, dating back to the start of the 90s. More recently some have started up successful rental portfolios based on a HMO model that seems to be working out well. One of my daughters is currently considering following this route too. It seems to me, as others have noted, that leverage via BTL mortgages underpins the outsized gains small investors in property have enjoyed over the past few decades. The article argues that the balance of costs has moved inexorably against landlords, perhaps foreshadowing a Gotterdamerung for BTL landlords.
I just have bad vibes about the whole thing, for some reason. There isn’t a week goes by without a thinktank of some kind saying the UK property market is in a mess. The hoary old saying ‘property is the best investment’ has led the nation to losing its sense of the purpose of housing – to provide shelter and humane living for families rather than purely as an investment. Now, for example, tiny two-up two-down terraced cottages in Cambridge, designed to barely meet the basic standards introduced in the early 20thC for housing ordinary working families, are now barely accessible to young, high-end salaried workers in tech or finance. It’s nuts. Then you have situations such as this: “Cornwall currently has more than 10,290 active Airbnb listings. Yet, in comparison, the housing website Rightmove had only 62 properties available to rent across the whole county [https://www.theguardian.com/business/2021/may/30/staycation-boom-forces-tenants-out-of-seaside-resort-homes]”. All this has been driven by easy access to leveraged loans based on valuations disconnected from reality.
I’ve no idea what the answer to all this is, as I barely understand how it has arisen, but, as noted above, I have bad vibes about the whole scence, man. Something is going to go pop one of these days.
Maybe.
@Alex / 43:
You make a good case with respect to costs, but I would point out some things:
1) Stamp Duty effectively just reduces your LTV. For example let’s say you have ‘only’ the £140K and not £165K (£140+£25 SD) for the £700K purchase. You can borrow £585K instead at a reduced LTV of ~84%. Obviously this drags you down just just above the 85% LTV threshold, which means an inferior mortgage deal, but that won’t always be the case (it could go from 76% LTV to 80% for example). In any case, a quick search shows the rate goes up to 2.44% for a 5 year fix. Over 5 years you’ll pay £9,480 more in interest, but still end up with ~£91K of equity, so that’s ~£15.5K better off than the £25K of lost equity you accounted for.
I also don’t agree that the renter will make £90K in ‘owner equity contributions’ (which you calculated at £1,167/mo) over the 5 year period. The renter has funds available to invest equal to the the delta between mortgage and rent (~£800/mo in the adjusted LTV scenario above with a mortgage of ~£2,600/mo). However, in the owner occupiers £2,600/mo payment they’re only paying ~£1400/mo in interest (which comes down over time). So both the renter and the owner are taking £2,600/mo out of their pay packet, but the owner is putting £1,200/mo toward equity/savings and the renter only £800.
2) Insurance – renters need insurance as well. My contents insurance on a 2 bed flat is already ~£120/year. I checked (just) building cover assuming a £700K valuation and it’s about double that. I think it’s a fairly negligible cost tbh.
3) Even if the renter does match the owners equity with their investment returns, after 25 years they will need to either buy a property or invest their pot at a rent equivalent yield so they can make rent in retirement. In this sense, they are taking *less risk now* but deferring more risk to later in life.
It’s fun throwing numbers around, and home ownership is definitely not a gravy train at these starting valuations, but one thing is clear: it’s not still not an obviously *bad* investment either.
@Alex – I agree that your figures are actually pretty realistic for somewhere in, say, London. If I was just starting out in London today, I’d not even bother thinking I’d ever buy a house – cheaper to rent.
@Asdf
“Would a bank lend me £500k to invest in a low cost index tracker?”
Yes, you can borrow money to invest in an index tracker at a rate of 1% p.a. variable. The problem? It’s a margin loan not mortgage (you have mark-to-market risk). If you did this, even at a 50% LTV, people would think you were absolutely insane. And yet they do it with houses at an 85% LTV, and that’s completely fine and normal. Go figure.
@47 – Finumus – interesting in that case, I’m not sure I’d look to rent if I had the option but it’s pretty finally balanced. I guess I’d still try and use rent a room relief, buy in south east where it’s a bit cheaper etc etc. Once you’ve got a family, renting becomes such a pain given moving around is v sub-optimal. Plus the gross yield on our property is around 3% (v poor) but provides a hedge against rising rents. One of the main reasons why I haven’t sacked it off yet is to put away enough money to buy a place for the children. Obvious one above but a margin loan via your mortgage is a safer exercise than with say IB but only works on some specific personal circumstances I guess.
@Andrew
I don’t think my first post did the best job of illustrating the point I’m making – and re insurance (@Boltt – oops!) it turns out that is far more of a substantial cost in Australia than in the UK. Guess when the country is on fire for several months a year that makes sense…
The comparison we’re really trying to get to the bottom of (numbers aside for now) is (1) the cost of “consuming” housing in each case, and then (2) the knock-on effect on what’s left over to invest, and what that is invested in. I think? So we’re interested in what’s different between the two cases, and can ignore costs consumed by both – utilities, council tax, contents (but not building) insurance etc.
1. For the renter this is the rent (plus associated fees which happily are nil here and I gather have improved a fair bit in the UK since I was there). For the owner the major irrecoverable cash costs are: transaction costs/taxes, maintenance, and cost of debt.
These are the costs for “consuming” equivalent housing whether renting or buying – we can compare those and someone will come out ahead depending on the numbers. That person can invest the delta, blow it all in Vegas – dealer’s choice. Per our discussion/example above these are fairly nip-and-tuck: a rental yield of 3% is not dissimilar to an owner’s costs of 1% maintenance + 1.6% cost of debt (~2% * 80%LTV) + transaction costs amortised over whatever period.
2 . Onto the investment side. Hopefully laying out this way also helps to take a bit of the mortgage repayment confusion away: both owner/renter can invest any spare cash (plus any savings delta). In the case of a repayment mortgage then clearly the owner has to invest this in the equity of the house. But if they were interest-only then nothing to stop them making the same investments as the renter – in fact that’s a semi-interesting 3rd case:
a) Renter invests in bog-standard diversified portfolio
b) Owner (repayment) invests in single, illiquid asset levered 5x… as Finumus says in the earlier comment (and I agree) if this weren’t a house it would be (rightly) thought of as lunacy…
c) Owner (interest only) is exposed to price of 5x levered single asset but could start to build a diversified portfolio if they wanted to. Does this make sense? Dunno. But while risky it doesn’t strike me as magnitudinally more risky than (b)?
We’ll all be roughly aware of house price vs. stock market returns. According to land registry data average house prices have returned 4.9% p.a. in the 20 years to May ’21 , or 6.1% p.a. since May 1996 if you prefer that (the 90s were wild). I had the devil’s own time trying to find source data on total returns for a diversified portfolio (or even the market for that matter) though I found that the UK all-share index has had a total return of 7.6% annualised since October 2002. Of course we’d expect a bond allocation to pull this down a bit, but the UK market returns have been pretty average compared to other geographies, so 7% isn’t a bad conservative estimate of the portfolio’s performance.
The returns assume the house owner has the market performance – which is unlikely to be the case. So sure yes some will do much better and others will do much worse. This also doesn’t consider/quantify the owner’s additional risks (which they aren’t being compensated for) such as illiquidity.
To your point about the retired renter being much worse off than the owner – not really. The owner has paid off their house, so their opportunity cost of equity is ~2% (on the whole lot) being 7%ish less the 5%ish average return in each case. They still have to cough up some “rent” in the form of maintenance, and if they choose not to maintain the asset then they’ll wear it as depreciation at some point down the line.
So while intuitively it might feel way more risky for someone to be retired and renting, the owner is paying for that peace of mind, just not with cash money. Opportunity costs are real!
Cheers
Alex
@Alex
From a tax perspective I think beating a repayment mortgage is still pretty tough unless you plan on leveraging your pension allowance.
Fixed-rate interest only mortgages seem to be practically non-existent at the moment until you get below 75% LTV, so let’s run a real world example:
£200K, less £25K stamp duty, investment on a £700K property => £525,000 borrowed over 25 years with Natwest, fixed for 5 years @ 1.39% = £2,073/mo repayment, or £608/mo interest only.
The delta of £1465/mo will allow you to accumulate the £91K equivalent 5 year equity target even with almost no growth, but in doing so in a tax efficient way you’re going to be using *88%* of your annual ISA allowance.
Probably would be better for a higher earner to sacrifice just 40% of that from their salary, and regain the other 60% in lost national insurance and income tax.
… actually I’d be interested to know if there are any obvious disadvantages to going the interest only route + putting the delta in to a pension.
… ok, figured it out. Obviously if property prices soared and you haven’t repaid anything you’re not going to have the equity to refinance and all your gains are going to be locked up in your pension.
So again, I can’t see how the good ol’ owner-occupier repayment mortgage can be beaten.
Every mortgage I have ever had has been interest only. I started off with an endowment mortgage where part of the payment went to pay the interest and the rest was invested, supposedly to pay off the capital at the end with some to spare. Actually it came up short, £33k instead of £40k (2.5* my then salary – the max I could get). With many years warning I had actually paid it mostly down before then. I would not go that route again. (I bought my current home by remortgaging my previous home and letting it – a LTB mortgage, though I sold it in 2020).
I have beaten the average stock market return of 7% every year I have been in BTL except last year, just from rents. I needed the income to live off so I haven’t been reinvesting them. They have also been more stable than the stock market.
The prices of property don’t become real until you sell or remortgage. My former home went up by about a third then dropped back after a change in planning law led to a glut of flats around it. Still I remortgaged it at £210k in 2014 and sold for £235 in 2019. The first BTL property I bought cost £58k in 2013 plus £10k to renovate and sold for £96k this year. I have used the money to buy a larger property for BTL.
@andrew
I’ll tell you the benefits of NOT having a capital repayment mortgage and have an IO one.
Payments on IO are usually less.
However any idiot can devise how much they would need to put aside to pay an IO mortgage off by a certain period.
When times are tough it is a lot easier to service an IO mortgage than a CR one.
With an IO mortgage the borrower can decide how much they wish to reduce the mortgage by.
Offset mortgages are excellent ways of managing IO mortgages though there are ‘issues’ with offset mortgages.
CR mortgages are terrible as it takes control from the borrower.
A borrower can afford an IO monthly payment but a CR one can be a struggle.
Could even cause mortgage default.
Rarely will this occur with IO.
I think the numbers can still work. I have a couple of buy to let la and recently added one with 60% deposit, a little above 2% interest on a 5 year fix. Return (rather than yield) is around 10% allowing a reasonable amount for maintenance etc and a long term (conservative) 3% pa house price growth. its never going to be as good as it was, but it’s still quite attractive if done right and self managed and of course a slice of luck / judgement with tenants. My model is to go for more family sized houses, ie 3-4 bed. Generally getting longer term lets and less undesirables. So far at least…
Stumbled into this article today and totally agree. I’ve just taken back possession of my single rental property. It was let out on a 2 year consent to let residential mortgage. When that deal was expiring it was no longer economic to rent the property at the old rent level. The tenant rejected the proposed new rent ( issued by section 13 notice ) and heated discussions commenced. He then gave his notice and now I have the house back. It’s on a off set interest only mortgage and I don’t want to clear the mortgage as it’s very low rate and offers easy access to the equity in the property.
The property will now stand empty for a bit. I was tidying it up last weekend and the neighbour then asked If Id be renting it out again.
As a counter:
In 2015 I bought a 3 bed house in Bristol at auction. I renovated it and let it out. It’s worth 33% more than costs and renovation, and generates 6%pa on these costs.
End of 2020 I decided to remortgage it on a BTL/interest only basis, in order to buy outright a one bad flat in London, rather than renting. This allows me to work for London wages, and saves me paying rent/someone else mortgage – all my work income is “profit”. Based on the remaining mortgage I’m earning 7.4%, of which some I’m using to pay into a passive ETF ISA.
Riding that provincial property boom, and buying via BTL, meant I could retain a “property business” while having no housing costs (except bills). Not bad for 37…
Quick questions about the gross yield mentioned towards the end of your article of 3.4% (2.3 after accounting for non financing expenses). Is this referring purely to the rental yield on the property or are you also accounting for capital gain on the property?
As a younger reader (in my 20s) I’m still conflicted on where to start investing the majority of my savings, between shares and property. I will most likely diversify and invest in both, but property seems very appealing due to the capital gains aspect and leveraging with mortgages. From my understanding the real money to be made in property is from the leveraged capital gains. If you manage to run a modest portfolio and the rental income is sufficient to cover your expenses then that’s as good as you will get these days and the real money is in capital gains (any spare income from rents is a plus but the aim is to at least break even).