Running a profitable buy to let

Icecream_Gladiator

My partner and I have some extra cash and lately we've been thinking of investing it to provide us with some additional income for retirement (we're both in our late 30s), plus maybe a little nest egg for our two boys.

One option I've been considering is buy to let, because:

1. It's an appreciating asset, so you could potentially sell it with profit. Our own 3 bedroom semi has gone up by about 30% in value since we moved in 5 years ago.
2. Someone else pays the mortgage
3. The rent you charge should also provide some regular income, which will go up massively once the mortgage is paid off


However, any way I crunch the numbers, I struggle to see how to turn any profit from the rent and not end up with a loss.

For example, where we live, you can buy a 1 bedroom flat for around £150k to £200k with rents of approximately £1,100 to £1,200. 

mortgage repayments, lettings agents fees, EPC, gas safety, electrical safety, possible maintenance costs all add up to more than the rent already, and that is not counting all the admin costs of running a business. Am I missing something here?

Are there any experienced BTL landlords willing to share any secrets or advice on how to run a profitable BTL business, how to start and build up your portfolio for someone who would like to start out too?

amanda1024

There are much more tax efficient ways to invest for retirement- pensions first, then ISAs. I think the general narrative is that BTL *isn’t* particularly profitable 

DE_612183

BTL is only truely a good investment if you can do it without a mortgage

propertyrental

DE_612183 said:

BTL is only truely a good investment if you can do it without a mortgage

and even then there are significant risks. Ever watched 'Nightmare tenants and slum Landlords on TV'?

Schwarzwald

Icecream_Gladiator said:

My partner and I have some extra cash and lately we've been thinking of investing it to provide us with some additional income for retirement (we're both in our late 30s), plus maybe a little nest egg for our two boys.

One option I've been considering is buy to let, because:

1. It's an appreciating asset, THIS IS NOT A GIVEN AND SHOWS LACK OF FUNDAMENTALS WHEN IT COMES TO VALUING AN ASSET   ... Our own 3 bedroom semi has gone up by about 30% in value since we moved in 5 years ago. THE LAST 5-10 YEARS HAVE BEEN A VERY SPECIAL MARKET ENVIRONMENT AND ARE NOT A GOOD PROOF OF FUTURE DEVELOPMENT, DONT GET FOOLED BY ANECDOTAL EXPERIENCE

2. Someone else pays the mortgage BUT YOU HAVE TO PAY THE DEPOSIT AND FOREGO YIELD ON SUCH PLUS TAKE ON CREDIT RISK

3. The rent you charge should also provide some regular income, which will go up massively once the mortgage is paid off BOTH ARE STRONG ASSUMPTIONS, REGULARITY MIGHT BE LESS REGULAR AND REPAYMENT OF MORTGAGE IS ALSO NOT A GIVEN


However, any way I crunch the numbers, I struggle to see how to turn any profit from the rent and not end up with a loss. THAT IS THE DIFFERENCE BETWEEN THE NOTION AND MYTH THAT BTL ARE EASY MONEY MAKING SCHEMES AND REALITY ...

For example, where we live, you can buy a 1 bedroom flat for around £150k to £200k with rents of approximately £1,100 to £1,200. 

mortgage repayments, lettings agents fees, EPC, gas safety, electrical safety, possible maintenance costs all add up to more than the rent already, and that is not counting all the admin costs of running a business. Am I missing something here?

Are there any experienced BTL landlords willing to share any secrets or advice on how to run a profitable BTL business, how to start and build up your portfolio for someone who would like to start out too?

some comments in BOLD.
i believe the only way to run a profitable BTL is via scale and professionalism, and then still it is questionable if other asset classes do not provide relatively better return given risk and also work involved. plus .... there is a broader question around the outlook for the UK, US equities with literally very little work mgiht massively outperform UK real estate, especially when you factor in potential currency movements between USD and GBP

theartfullodger

Most years i make money from  BTL...  but not always.

Forget the myth that BTL is always a good investment - it ain't.

Have you the financial AND emotional reserves to cope with the tenant-from-hell (or agent-from..) who pays no rent for 7 months whilst you pay mortgage, legal/court fees and for repairs?  Repairs you ask?  If repairs not sorted who'd you think judge will favour ??

Who knows what income and CGT tax changes over the coming years? (There are more than 10 taxes a landlord may pay....)

Do you gamble with other significant assets?

Artful: Landlord since 2000

tacpot12

I am a BTL landlord. I have just one property. I would agree with the comments above, but my own experience is that it can work and can be profitable. 

I bought a flat with my partner, who had some cash they wanted to invest. I had some cash but also took out a large personal loan, as the property need a few imprevements before it was ready to let. The rent payments cleared personal loan in the first three years, and since then it has been producing a steady income. It has appreciated (bought for £56K in 2013, valued at £80K in 2022 when I bought my partner out) so about 4% pa.  There are no guarantees that this will continue, but some house price inflation is likely to be the case while properties remain in short supply. 

Rental yield has been about 6.5% (after all costs). We got lucky with the tenants that stopped paying the rent in 2020, as they disappeared when we sent them a Section 21 notice. The left a good amount of 'possessions' in the property that we had to deal with, and the deposit only just covered the repairs needed.

I approach the job of being a landlord professionally, and also use a letting agent (which reduces the yield). Even so, I have slowly come around to the notion that private landlords should not really be allowed to rent out residential property because of the effect on the security of the tenants. Families need stability, especially where there are school age children involved. Private landlords are really only landlords for short periods, perhaps 10, 20 or 30 years, but eventually every private landlord (or their heirs) will evict the tenants so they can sell the property. To my mind, it would be better if only public companies (e.g. housing associations) were allowed to rent residiental properties. This way tenants could be sure that they weren't going to be evicted if interest rates rise or if the landlord gets too old to want to deal with the hassles of running a property business. So, if you are going to do it, commit to being professional and being in it for the long-term. Also check that your partner is comfortable with the idea of having to evict tenants if they turn out to be destructive or non-payers.

I don't think you have got your calculations wrong. With property prices and mortagage rates as they are, there is much less opportunity to make money (and the government is still gunning for landlords), so further costs (such as compulsory licensing) might be on the way. Investing in the hope that house price rises will give you a decent return is a very risky gamble. However, the right property at the right price, might start to make a good return in 20 years or so when the mortgage is paid off.  

ProDave

And one more thing to put in the decision.  Sooner or later there will be a minimum EPC requirement for a rental property, so don't buy a cheap old property with a poor EPC unless you plan to finance significant upgrades.  Personally I would not buy anything worse than EPC C

All the rules that govern landlords have been moving in favour of tenants lately and many landlords, including me have quit.  I would not choose to go back.  You have to WANT to be a landlord, rather than thinking of it as an easy way for someone else to buy your retirement next egg for you.

Elliott.T123

Schwarzwald said:

Icecream_Gladiator said:

1. It's an appreciating asset, THIS IS NOT A GIVEN AND SHOWS LACK OF FUNDAMENTALS WHEN IT COMES TO VALUING AN ASSET   ... Our own 3 bedroom semi has gone up by about 30% in value since we moved in 5 years ago. THE LAST 5-10 YEARS HAVE BEEN A VERY SPECIAL MARKET ENVIRONMENT AND ARE NOT A GOOD PROOF OF FUTURE DEVELOPMENT, DONT GET FOOLED BY ANECDOTAL EXPERIENCE

Schwarzwald, while I don't disagree at all with your main overview and would advise most people that they should avoid the BTL market and there are far better ways to invest money I do have a slight issue with this reply. Yes over a short period of time there is no guarantee at all of property appreciating and the figures do appear at least to show the rate of average property increase slowing but the OP said they were late 30s and mentioned retirement. I think it is a fairly safe comment that over the next 20-30 years the property will increase in value.  

You say the last 5-10 years have been special, ok shall we look at other years (according to Gov data on average house price)? 

1970 - 1980 - 375% increase
1980 -1990 - 215% increase
1990 - 2000 - 45% increase
2000 - 2010 - 99% increase
2010 - 2020 - 38% increase

Now a totally separate question would be if that rate of appreciation matches the rate that could be achieved elsewhere (highly unlikely), but that was not how it was worded.

SiliconChip

Elliott.T123 said:

Schwarzwald said:

Icecream_Gladiator said:

1. It's an appreciating asset, THIS IS NOT A GIVEN AND SHOWS LACK OF FUNDAMENTALS WHEN IT COMES TO VALUING AN ASSET   ... Our own 3 bedroom semi has gone up by about 30% in value since we moved in 5 years ago. THE LAST 5-10 YEARS HAVE BEEN A VERY SPECIAL MARKET ENVIRONMENT AND ARE NOT A GOOD PROOF OF FUTURE DEVELOPMENT, DONT GET FOOLED BY ANECDOTAL EXPERIENCE

I think it is a fairly safe comment that over the next 20-30 years the property will increase in value.  

There's a good chance that you're right about that, but it will require the OP to make regular investments in maintaining and possibly improving the property (particularly to keep in line with legislative changes for landlords), both to ensure that it's tenanted for a high proportion of the time and to make it an attractive property to be sold when the time comes.

Elliott.T123

SiliconChip said:

There's a good chance that you're right about that, but it will require the OP to make regular investments in maintaining and possibly improving the property (particularly to keep in line with legislative changes for landlords), both to ensure that it's tenanted for a high proportion of the time and to make it an attractive property to be sold when the time comes.

I was just being a pedantic t**t if I am honest, the wife hates it! I was ignoring all other factors and focusing solely on property prices appreciating (in theory you could ignore inflation and focus only on actual price in which case as long as the property is sold for 1p more than it was purchased for it has in theory appreciated even if inflation has increased at a faster rate). As I said, pedantry aside I absolutely would not recommend getting into the BTL market