passive income from rental property as retirement income

Cornucopia

atush wrote: »

It depends on those costs- you can't charge above the market, so the market does control rent in a way.

Obv if your costs are lower than normal, you can choose between extra profit for yourself, or lower rents.

The point is to charge a more affordable rent. (This is defined as 80% of the market rent by the Powers That Be).

fizio

Personally speaking, I'm not at all convinced that BTL is a good investment if you are starting out now. I have a BTL with no mortgage and it yeilds 6-7% but after expenses etc this is more like 5% and my stocks and shares ISA has been delivering closer to 10% with little hassle versus the BTL.
I did think about leveraging current BTL to get another one but can't really make the maths work out to make it worthwhile.
I'm no expert though so I'm sure BTL works for others who are more informed/experienced in this segment or have 'connections' enabling them to get property well below market value etc

Cornucopia

It needs the leverage to make sense.

N1AK

haf63 wrote: »

Personally speaking, I'm not at all convinced that BTL is a good investment if you are starting out now. I have a BTL with no mortgage and it yeilds 6-7% but after expenses etc this is more like 5% and my stocks and shares ISA has been delivering closer to 10% with little hassle versus the BTL.
I did think about leveraging current BTL to get another one but can't really make the maths work out to make it worthwhile.
I'm no expert though so I'm sure BTL works for others who are more informed/experienced in this segment or have 'connections' enabling them to get property well below market value etc

Shares certainly haven't been generating 10% YoY over long periods. It's also not an uncommon view to believe the current price is inflated by low interest rates and quantitative easing.

The maths on a house to me is roughly that you can invest ~20% of the value. It wouldn't be an unreasonable assumption to assume the price increases by 2% a year on average (probably not even matching inflation) and a net yield of 4-5%.

If you invested in a £200k house on that basis you'd make £4k per year in price inflation and ~£9k in net yield. If you can arrange a mortgage over 20 years that the yield pays from then you're getting £11,500 a year in property value for no additional cost (over 20% return on your investment).

Now I haven't bought a BTL, I wouldn't invest on the basis of expecting that margin etc but I think the case for a BTL can be made quite easily.

fizio

N1AK wrote: »

Shares certainly haven't been generating 10% YoY over long periods. It's also not an uncommon view to believe the current price is inflated by low interest rates and quantitative easing.

The maths on a house to me is roughly that you can invest ~20% of the value. It wouldn't be an unreasonable assumption to assume the price increases by 2% a year on average (probably not even matching inflation) and a net yield of 4-5%.

If you invested in a £200k house on that basis you'd make £4k per year in price inflation and ~£9k in net yield. If you can arrange a mortgage over 20 years that the yield pays from then you're getting £11,500 a year in property value for no additional cost (over 20% return on your investment).

Now I haven't bought a BTL, I wouldn't invest on the basis of expecting that margin etc but I think the case for a BTL can be made quite easily.

fair point and I agree that both S&S and BTL have up and downsides with possible stock market crashes on the one hand and 'tenants from hell' on the other.. There is risk on both sides and all i can say is that over the past 5 years I have done better on S&S ISA's than my BTL. Next 5 years may well be a different story but I am not rushing to buy another BTL

jamels2

Can I give an example here, say somebody had a lump sum early in their life, maybe worked really hard in their 20s and bought 2 properties aged 30-35, putting 20% down on each with 25 year mortgages.
They live in one and work to pay that mortgage off.
They rent out the other, the rent covers all costs involved.
After 25 years they retire, their own property is paid off, so is the rental property.
From then on, the rental income pays the bills and provides enough income to live comfortably, go on holidays etc in retirement.
Is there anything wrong with this idea? I'm assuming they bought well and the rented property is always in demand.

fizio

jamels2 wrote: »

Can I give an example here, say somebody had a lump sum early in their life, maybe worked really hard in their 20s and bought 2 properties aged 30-35, putting 20% down on each with 25 year mortgages.
They live in one and work to pay that mortgage off.
They rent out the other, the rent covers all costs involved.
After 25 years they retire, their own property is paid off, so is the rental property.
From then on, the rental income pays the bills and provides enough income to live comfortably, go on holidays etc in retirement.
Is there anything wrong with this idea? I'm assuming they bought well and the rented property is always in demand.

In theory this sounds fine - assuming minor points such as finding 20% deposit for 2 properties can be achieved - given house prices and other costs involved. Plus I'm not sure that rental income will be enough for someone to live off given that the property is likely to be at the 'bottom' end of the market in order for it to have been affordable to start with.
A lot of people have been able to make this sort of model work in the past but I suspect its likely to be more difficult nowadays.

Daniel54

Cornucopia wrote: »

It needs the leverage to make sense.

Leverage can be a double edged sword,as you clearly understand but the OP ( and others) I fear underestimates.

Investing in property unleveraged does make sense as a diversifier,either through a BTL or in a fund.We have both,but the BTL is less than 5% of our total assets and likewise the commercial property fund in my SIPP is about 4% of the total.

Om my wife's BTL I reckon our numbers are pretty much identical to haf63's ie 5% net return pa

Even in Jamals2 Panglossian scenario,you end up with an asset which generates income without the capital,or you sell the asset and spend the capital.In both cases you pay tax -income and/or CGT.

I am with very much haf63 on this ,and on reflection I think this is because I had enough worries and ups and downs over 30 years of being mortgaged to pay for our homes up the ladder ( now all paid off ) that I would not have wanted the additional financial strain of a BTL mortgage that could have sunk me if things had gone wrong and I certainly don't want it now that I am financially secure and debt free.

Cornucopia

All good points. And every BTL LL is likely to have a portfolio that includes properties specifically chosen for the purpose, and others that are turned around from personal/family purchases.

The former can be properly planned (as far as the market will allow), but the latter can be something of an unknown quantity.

Ultimately, you can only do the homework you can do, and make the best decisions you can at the time.