On paper—or rather, on bricks and mortar—buying property in the UK has to be a no-brainer way of gaining an asset that will always appreciate in value, and which offers you the most passive income of all: apart from an occasional steam clean of a carpet or two that’s witnessed an end of year exams party, or replacing one bit of flatpack furniture with another, all you have to do is watch the monthly rent transfers bang in. After all, recent figures from Zoopla show there are now 21 UK households competing for every property to rent .
OK—then how come this landlord recently posted a blog with the title, ‘Buy to let; RIP’… or that he, and many others, say this is actually not a licence to print money and a bit of mug’s game? His post walks us through a long set of problems and challenges getting value from being a landlord in, yes, London, the hottest rental market of them all, including:
-Falling Net Yield Despite an initial rental yield of 6%, rising costs (service charges, management fees, and mortgage interest) reduced his net yield to 2.7%, making the investment barely profitable
-High Service Charges Annual service charges of £7,500-£8,000 significantly eroded what he was getting from even market rate rental income
-Expensive Leverage While low-interest rates post-2008 made borrowing attractive, recent increases to around 6% turned mortgage interest into a real financial burden
-Government Unhelpfulness While rental income is taxed at marginal income tax rates, capital gains tax liabilities have grown over time due to changes in tax laws, reducing overall profitability.
-Poor Capital Appreciation: Despite early gains, the property failed to appreciate in the last seven years, with possible value declines of over 10%.
Then there is all the hassle of being a landlord—which, it turns out, goes way beyond that occasional furniture replacement:
-Compliance with energy performance certificates (EPC), gas/electric safety, and new landlord regulations added stress and administrative work
But worst of all, all his hard work and sunk investment didn’t really get cashed out in the end. While leverage helped boost equity returns to 9.5% p.a. over two decades, returns in recent years barely tracked inflation; in the last phase of his 20 years of this, profit of under 3% a year have just been insufficient given the effort and risk involved, prompting the author to exit the market in search of better opportunities. To rub it all in, selling the flat took nearly a year, with transaction costs totalling 4-5% of the sale price—and the six months it stood vacant until he did sell meant zero rental income for half a year.
Not all good ideas stay good for ever
The reality is that buy-to-let, once a lucrative investment, is now plagued by high costs, poor capital growth, regulatory burdens, and declining profitability, making it no longer worth the effort, he claims. Well, that’s just one bad experience, maybe?
Unfortunately, not. By definition, even if buy-to-let was once again in its golden days of the 1990s and 2000s, it will always take you months to sell even the best flat in a fashionable postcode, so it’s not a liquid (easy to access if you need it quick) asset. It limits the diversity of your portfolio, as you have, if not all, a lot of your eggs in one basket (in one street, in one neighbourhood, in one country, usually). You can’t sell off bits of it to fund your lifestyle (you cannot sell one bathroom out of one house or one bedroom off one mansion flat). And as the guy shared, dealing with tenants, broken boilers, midnight flitters, burglaries, etc etc is not conducive to relaxation.
Don’t get me wrong; some people thrive at all this, but only if they see it as their primary or at least majority way of making money, i.e. it’s their business and this is what they do all day every day. If you are a high-net-worth individual doing great and challenging things in technology or finance, you just don’t have the bandwidth for that.
What you actually want is a way to invest your money and make it work for you in the background, and as hard as you can arrange it. And the best case for not going too all-in on property is that it fails the first test for an investment strategy, in that it lets the Crown take too much of it off you (that’s to say it’s really tax inefficient: you can’t put in an ISA or a pension, you can’t defer your rental income and have to pay maximum rate tax on it… unless you incorporate it and put it in a business, which we are trying to get away from and which incurs yet more taxes in turn!).
Not convinced yet? Well, let’s say you are a stubborn character and want to still have a go. Just be realistic and accept that the cost of doing business in buy-to-let means:
• High Entry and Exit Costs Buying a property involves significant upfront costs like stamp duty, legal fees, and survey costs. When you decide to sell, you will also be hit with estate agent fees and potentially capital gains tax. You are not being serious unless you factor all this in
• You Are at The Mercy of the Monetary Policy Committee If you’re relying on a mortgage to purchase an investment property, a rise in interest rates can dramatically increase your repayments and eat into or even eliminate your rental yield. And if interest rates are high, then there will be fewer people who can get on the property ladder willing to take that bohemian one-bed in Leyton E10 off your hands. And in her first Budget, the Chancellor pushed stamp duty on second properties and buy-to-let up from 3 to 5% anyway, while higher rate taxpayers get less relief, too
• To Get In, You Are Starting Off in Debt To buy an investment property you will need to borrow money. This automatically increases your risk, as it amplifies your returns but also you can end up owing more to the bank than the value of the property.
After all these years of helping people make long-term plans that help them cash out and live the lives they’ve ultimately always wanted, my gut is that you need to always see your investments as strictly means to an end and whose only purpose is to help fund your financial plan so that you can reach your goals. Here, liquidity, cost and diversification are all things you should be looking to make work for you, and so over your most lucrative working years, I’m going to have to tell you, a place to live in and go on holiday to, yes—but rentals or HMOs as a way to make you rich, nah.
Get in touch for a better idea of how to invest your money, one which aligns to your financial plan,