Some Thoughts On Buy-To-Let Investing

Firstly, I’m not a landlord nor do I even own a home yet but I’m confident I know enough to comment on this subject through my experience as a tenant for 24 months and my dad being an experienced landlord. It’s reasonable to have a read of the following article and its comment section here just to get an update of the recent BTL scene.

There’s a lot of anger in the community towards “rich landlords buying all the properties and driving up house prices” for poor sods like you and I who can’t afford a decent place to live. There are all sorts of arguments including how “morally wrong” it is to be a landlord. I completely get the frustration but people should consider the following question. Is it reasonable to expect someone to take an opportunity to make extra money? The answer is obviously yes so we shouldn’t be angry or surprised.

My experience as a tenant

A few months into my first year as a tenant in Wakefield tiny flies (much smaller than a housefly) started to move in, without paying their fair share of rent. I suspect over the months probably hundreds came and went. It was disgusting but they weren’t attracted to food or seemingly anything so the extermination process wasn’t straight forward. Now you might recall me paying half of my salary (£1,000+) in rent and bills so the fact this problem lingered for most of my tenancy was a bitter pill to swallow.

The estate agency was frankly incompetent, dismissive and understandably sided with their long term landlord customer. This is the unfortunate nature of the triangle relationship between estate agency, tenant and landlord. It took many phone calls and even a complaint to their head office before the landlord and contractor visited. It’s funny now but his condescension at the time was remarkable and I know my ego’s probably taken over this paragraph but for him to speak to me like that, you would’ve thought he was a judge trialling me for a patient error!

Anyway, the problem was never fixed and I really couldn’t wait to leave that flat and estate agency once the 12 months were over.

Of note, my second year was much more uneventful. The rent and bills amounted to around £800 every month and I don’t recall any issues. Looking back, maybe it was a lucky year but the landlord and I never came into contact even once in those 12 months.

Do I dislike landlords? I certainly disliked the first one and as a tenant I can understand why there is so much hate towards them. The fact that tenants feel they’re paying their landlord’s mortgage and council tax theoretically entitles them to good customer service but in reality tenants are often mistreated like second class citizens.

I’d say that customer service from landlords and estate agents definitely needs to improve, and not just at the point when you’re looking for a place to rent. Having said that it could just be British customer service in general though and before anyone accuses me of racism, those who’ve travelled to places like Japan know exactly what I’m talking about.

The second point is that whilst it’s true that tenants are paying for their landlord’s mortgage and council tax, this is ultimately in exchange for a service i.e. a place to live. We don’t complain nearly as much when paying off our car loans or groceries so I think it’s unfair on the landlord.

A quick calculation

If we go one step further into the shoes of landlords, rental income never comes easy.

Landlords need to ensure the property is “safe” by jumping through all sorts of hoops (rightly so), such as gas and safety checks and carbon monoxide alarms etc. The estate agency then takes a variable cut up to 10% of the rental income for their services which can include collecting the rent on behalf of the landlord and general management. Landlords are obviously responsible for repairs and significant “factor fees” that eat away into their rental income.

In the past they were allowed to deduct the entirety of their mortgage interest from their tax liability but this is being incrementally reduced the next few years until 2020/21 when landlords will only be allowed to claim 20% tax relief from their mortgage interest. A quick calculation for those who’re interested:

If you place a £20,000 deposit down on a £100,000 city centre apartment in Scotland, for example, you can roughly expect £600/month in rental income. A £60 management fee is automatically deducted by your estate agent leaving you with £540 x 12 = £6,480 a year.

A standard 4% mortgage on £80,000 means £3,200 in interest for the first year, reducing your income to £3,280. In April 2021, only 20% (20% x £3,200 = £640) of the mortgage interest is tax deductible so you’re taxed as if you earn (£3,200 – 640) + £3,280 =  £5,840. If you’re a higher tax payer then shave £2,336 off your £3,280 leaving you with less than a grand of “profit” for the entire year’s work!

This is only assuming you have no factor fees, gas and safety checks, insurance and potential repairs to pay for, which obviously isn’t true. Don’t forget one-off costs like furniture and lawyer fees so for our first couple of years as a landlord we could well be in the red.

Even with the amazing advantage of leverage, BTL investing is slowly dying. Some of us may be willing to hold out the first few years and make a small loss on our first property but what about the opportunity cost from not investing that £20,000 into the stock market returning a historical 5% return every year? No stress from flat viewing, long phone calls with estate agents and contractors and just-a-lot-of-hassle.

The other shake-up in the BTL scene you may have heard about is the stamp duty hike of 3% on second homes. Previously if you bought a small flat for £100,000 you’d pay no stamp duty. This new rule results in an extra £3,000 tax bill which, in our example, sets our hero landlord back a further year.

Stop victimising yourself and master your own destiny 

In closing, I just wanted to mention how ridiculous it is that everyone is a victim in 2016. Landlords are complaining left right and centre that they’re being targeted by the government for doing a “good thing” supplying housing to people. Tenants are complaining that they can’t afford a place to live due to evil landlords, expensive rents and housing.

If BTL didn’t yield passive income I’m quite sure landlords wouldn’t be “doing a good thing” and letting strangers live in their homes for free.

Similarly, tenants should stop hating on landlords. Nobody is forcing us to rent – we can live in a RV, with parents or even in a tent.

Last thoughts:

  1. If you’re an aspiring landlord looking for rental income, I wouldn’t recommend buying a second home due to the new rules. If you’re fortunate enough to own your own home and you’re comfortable with letting a room out to a stranger(s) then you can earn up to £7,500 tax free every year as long as you’re a resident landlord.
  2. If you’re a disappointed tenant, just remember that the world doesn’t owe us anything. We should work hard, amass enough fortune to invest in vehicles that will generate passive income. Follow this blog to see how I create passive income through dividends and P2P lending, two vehicles which I believe are much more attractive than BTL investing.

As always, do your own research.

P.S. I learned everything I know about finance from this book, this book and that oneamongst many others. For a more extensive list, don’t hesitate to drop me a line at rory@ukdoctoronfire.com. If you prefer learning through listening use this link to earn a free audiobook of your choice by signing up to their 30-day free trial. Simply cancel with the click of a button if you decide later on that the service isn’t for you, no questions asked.