Should I become a landlord?

Explore the pros and cons and make an informed choice.

Should you become a landlord? My short answer is YES (because if you are asking the question, I assume you have already thought about it) but it’s a little bit more complicated than that and it depends on several factors including your personal aspirations and property ownership goals.

Why become a landlord?

There are many ways to invest in property, some are short term and others are longer term. If you are after a long-term investment strategy, then being a landlord is something to consider for the reasons below:

• Monthly return: When you invest in property, you can get a rental income that acts as an additional source of income. You can also benefit from capital growth when you sell the property at a higher price than you originally bought it for.
• Capital growth: Property prices will fluctuate over time but in the longer-term however, property prices tend to appreciate as long term economic, demographic, and regional factors can all contribute to an increase in value. The appreciation rate can vary depending on local market conditions, such as supply and demand. The loss or gain on your property will only be realized when it is sold therefore if property prices fall and you can wait it out, it may be advisable to hold onto the property as you may be able to recover any losses you incur and make a profit in the long run.
• Good retirement plan: Property can serve as a good retirement plan, either for capital growth or rental return. Investing in property can provide significant rental returns over the long term, and the returns can be used to supplement retirement income. Property can also appreciate in value over time and can provide a profit when sold.
• Easy to understand: Property investment is an age-old investment strategy that is easy to understand.
• Hedging against inflation: House prices tend to rise with inflation so with high inflation, your rental income and property value would increase.
• Diversify portfolio: Owning real estate is a great way to diversify your investment portfolio

It’s not for the fainthearted

Challenges of being a landlord

• Cost of entry: Property investment is a more costly investment option than other investments like stocks and bonds. The average property price in the UK is £296,000 as at October 2022 so you will need at least 25% (£74,000) of that and other costs such as legal fees, mortgage valuation etc to buy a property. This puts it out of reach of many people.
• Tax implications: Landlords are no longer able to deduct mortgage interest payments from their rental income before calculating their profit. This has been replaced by a 20% tax credit, leaving 40% taxpayers out of pocket. This can be avoided by buying as a limited company depending on your circumstances.

Am I cut out to be a landlord?

There are genuine fears people have about being a landlord, most of which can be mitigated against.

• Property prices: Prices may not always rise but remember that even if the price stays static, you are still benefiting from the monthly return on your initial investment. If you have taken a long-time view and do not need to sell in a hurry, you can always wait it out when prices fall and wait for property prices to rise again.
• Problem tenants: Oh yes, this can be a real concern from late rent payments to property damage but in my experience, these issues are few and far between. There are also many ways to avoid this and therefore this shouldn’t be a deterrent to being a landlord.
• Regulations: In recent years, there have been regulations directed at landlords which can come across as quite burdensome but again these are things that can be easily maneuvered or passed on to someone else to deal with e.g. a property management company.
• Void periods: Void periods are periods when a rental property is sitting empty and the landlord is not getting any rent. This can happen if the tenancy agreement has ended, the tenants have moved out, but the landlord has not been able to find new tenants to occupy the property. These can be a real problem if it happens too often but again can be mitigated against by careful planning.
• Problem selling: An investment property is more difficult, but not impossible, to sell because they are tenanted.
• Interest rate rise: Recent events have brought this to the limelight. Again, proper planning can help to reduce the burden on interest rate rise on the landlord.
• Maintenance: Burst pipes, leaks, property visits, broken boilers and more. These are issues that could keep you up at night. It’s not for the fainthearted

Reasons not to be a landlord

• Short term investment: Real estate is a particularly illiquid asset because the sales process can take a lot of time and effort before you actually receive your money and therefore require a long-term approach to be successful. If you think you may need access to your money at short notice, property investment is unlikely to the best form of investment.
• Get rich quick: Property investment is not a get rick quick scheme. It takes time, patience and knowledge to make money off of real estate investments, and there is a real risk that you may not make the returns that you hope for. As such, it is important to understand the process and the risks before investing in real estate.

Is now a good time to buy?

The timing of buying property is highly individualized and depends on your individual financial situation, goals, local market conditions and risk tolerance.

Can you afford it? is the rental return good? Have you done your homework regarding the short- and long-term rental demand in the area? Does the property have good cash-flow? These are all questions that require honest answers.

Before deciding whether now is the right time for you to buy a property, research the local market, consider your financial capability and what your property ownership goals are. Speak to a financial advisor or real estate professional to help you make an informed decision.

If the answer to the above questions is yes, then my personal opinion is that it’s a good time to buy for you.

You can never really know if property prices are going to rise or fall and by how much but if you are investing for the long term, then short time falls shouldn’t bother you. Furthermore, if the return is good then you are making money on your investment anyway regardless of the capital growth element.

Also, worthy to note is the current under-supply of housing the UK. According to the UK government, the housing supply is currently lower than the Government’s ambition of 300,000 new homes per year. 216,000 new homes were supplied in 2020/21 leaving a major shortfall of properties in the market and therefore an opportunity for investors.

Don’t wait to buy real estate, by real estate and wait.

T. Harv Eker

Real live example

I have a friend who purchased a new build property during the UK property boom in the early 2000’s. In my opinion, it was a very bad buy. It was one of those new developments where the prices were exorbitant compared to other prices in the area and came with many incentives to incentivize buyers.

When you purchase a new build property, you tend to pay a premium, meaning the actual value can be 0-10% below the price at which you purchased it. New builds appreciate in line with all other properties so depending on the area, it may take a while for the second hand houses to catch up with the new build prices. It is important to note that once the property is purchased, it is no longer a new build.

To cut a long story short, the property price fell by as much as 20% after the crash, in line with the property prices in the area, so she was effectively in negative equity. Luckily, her rental return is still quite good so she is making money from the original investment but can’t dare sell yet. She is waiting it out and the property is beginning to rise slowly and as long as she can wait it out, she’ll be okay.

New build properties always attract a premium so when buying new build property to let, make sure you are not paying more than 10% of the existing properties in the area

So if you’ve think you’ve caught the property bug, check out my blog on becoming a landlord.