Five Reasons Why Buy-to-Lets are BAD Idea
I’M a landlord and I know that people love property. For most their home is their No1 asset and the one which they’re most proud of.
But that doesn’t mean you should buy another property and rent it out.
You probably think houses are great investments because they increase in value and will provide an income well into retirement.
Unfortunately, there are five big downsides to this plan…
1. You Won’t Make Loads of Money
Rental yields can be pitiful (especially in the UK). I know this for a fact because my wife and I have two small properties which we rent out.
However, these weren’t purchased as buy-to-lets, rather they were our individual flats/apartments before we bought our family home in 2013.
So we are accidental landlords because it wouldn’t have made financial sense to sell up at that point when prices were in the toilet.
The yield on both these properties is around 4%. So every £100,000 of bricks and mortar only pulls in £4,000 a year.
That just isn’t good enough when other investments are better options. You could expect a greater return than 4% in the stockmarket, with less work.
2. It’s Too Much Hassle
Buy-to-lets are not passive investments. If you think you can just snap up a property, get a tenant and then count the money as it rolls in, you’d be sadly mistaken.
Being a landlord is hard work, it’s a job – even if you hire a management firm to look after the heavy lifting.
Things always go wrong, even with well-maintained properties. And if you’re not doing repairs and replacing broken appliances yourself, the costs can rocket.
Then there’s the stress. Can you cope with the void periods without a tenant as the bills start to pour in?
Will you dread the phone calls telling you the tenant is reporting yet another problem which is going to cost you time and money?
Even if you’re lucky and you find a good tenant, they won’t look after the property as well as you, because they don’t own it.
3. Hefty Fees
If you’re still dreaming of rentals, don’t forget the all the cash you’ll have to pay out before you even get your hands on the keys.
Stamp duty, lawyer fees and surveyor costs can run into the thousands.
Then if you need a mortgage, there are set-up fees and interest payments. Plus insurance, etc.
Once you actually own the property the outgoings don’t stop.
I had pay to register as a landlord and then spend more to make sure my place met health and safety requirements.
Plus, I hired a rental agency to find me a tenant and that involved advertising costs. The agency also manage the property for me. They pocket half of the first month’s rent, as well as 10% of the other rental income.
If I were retired I would find tenants myself and look after things, but at the moment I don’t have the time. There would still be costs but I’d save 10%.
But we’re not done with expenses yet. There are repair bills and you’ll need to redecorate and replace carpets, more often than you’d think viagra non generic.
All in all, if you bank 9 months of rental income every year, you’ll be very lucky.
4. All Your Eggs are in One Basket
Any personal finance expert will tell you that diversification is vital in an investment portfolio.
Well, if you’ve sunk all your money into a buy-to-let that’s risky – very risky.
Don’t forget you’ve probably got a lot of your wealth in property already (your home). Piling more into this asset class could leave you dangerously underweight in other areas such as stocks and bonds.
It’s a gamble – a straight bet that the housing market will outperform all other investments.
5. No Easy Access to Your Cash
This is always the worst.
Say you need money quickly – it could take months, even years, to sell up and get the cash back in your bank account. And don’t forget the taxes and fees you’ll need to pay before you see a penny.
It’s never sensible to tie up so much of your net worth.
Compare this to a stockmarket portfolio which can be liquidated instantly, with the proceeds available within a couple of days.
So What is My Plan?
Circumstances forced me into becoming a landlord and now that I’ve tried it for a few years, I don’t like it.
It costs too much, the returns are rubbish and it causes far too many headaches.
When the property prices where I live get to what I consider “fair value” I’ll be selling up.
All the money will then go into a diversified global portfolio of index-linked stocks and bonds.
It’s a much easier option.