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The idea of building a property portfolio – to bring in a retirement income via rents – is often very attractive. Here, Buy to Let can be a compelling option (since few people can afford to buy a set of rental properties outright). The strategy typically discussed is to buy, say, four or five Buy to Lets – using the rental income to cover the mortgages, as well as bring in monthly profits which can support a retirement lifestyle.
However, is this a realistic route to a comfortable retirement? In this article, our team at Cedar House shares thoughts from our London-based financial planners. We hope this content helps you. If you want to discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:
020 8366 4400 or email@example.com
How a Buy to Let portfolio works
A Buy to Let is a type of mortgage that allows you to rent out your property. This, in theory, can open up a route of direct property investment. Not only can you (hopefully) enjoy capital growth on property value itself, but also enjoy regular rental income from tenants along the way. For instance, suppose you get a Buy to Let (BtL) property worth £200,000 – putting down a £50,000 deposit for the mortgage. Here, imagine your mortgage repayments are £700 per month. You then look at the market rate for rents in the area, and judge that you could get £900 from rental income each month.
With, say, five properties like this, a monthly profit of £1,000 on your Buy to Let portfolio may be possible. When combined with other income sources (e.g. your State Pension), this theoretically could help support a retirement lifestyle over many years. In the future, additionally, when the mortgages are paid off, you can hope to enjoy even higher profits. This could let you add even more properties to your portfolio, or enjoy a more luxurious retirement lifestyle.
The risks of a BtL retirement
Maintaining a Buy to Let portfolio can be a lot of work. Managing a dozen or more tenants can involve regular on-site visits, phone calls and emails (e.g. to address noise complaints). Using a letting agent can help reduce some of the stress. Yet this route adds a monthly cost which erodes your profits, and your agent will still need to contact you regularly – e.g. for permission to conduct maintenance/repairs. Many people in retirement are happy to take on this regular work, but others are understandably looking for fewer demands from their retirement investments!
There is also the risk of periods when you may not have tenants. Many landlords struggled to get new tenants, for example, during the 2020 Covid lockdowns (restricting property viewings). During these times, you would need to cover the BtL mortgage yourself. However, this risk can be lowered by ensuring as wide a gap as possible between your rental income and mortgage payments. A higher BtL deposit can help with this. Naturally, a 50% deposit will mean a lower monthly mortgage repayment than, say, a 25% deposit. This helps to make periods of tenant absences more manageable – although you should also consider the risk of interest rate rises in the future (which could put up your mortgage).
Also be mindful of other costs that may eat into your BtL profits. If you need to keep items in self-storage, for instance, then this can add £100s to your monthly expenses. Also, the rules about repairs can often be punitive to BtL landlords. Suppose your carpet is damaged by a tenant’s neglect. Here, you – not the tenant’s deposit – will likely need to pay for a replacement if the carpet is more than three years old.
Again, having lower BtL mortgage repayments can help take away the sting of these costs. Yet this requires gathering a larger deposit, which may be hard to achieve.
Other options to consider
Perhaps the biggest risk of concentrating retirement wealth in Buy to Lets is that it leaves you overly-vulnerable to the housing market. If, say, a future government increases taxes on direct property investments, then this could disproportionately affect your returns. For most people in retirement, therefore, BtL can be a good option if it is included alongside other income sources from outside of property. These can include your State Pension, ISAs and personal/workplace pension income.
Bear in mind that other assets can be more tax-efficient than Buy to Let, particularly from an inheritance tax (IHT) perspective. Pension pots, for instance, are exempt from IHT upon your death. Yet direct property investments will be subject to IHT at 40% once your estate exceeds £325,000 in value (although this can be extended – e.g. by £175,000 using the main residence nil rate band rules). For those looking for less hassle in retirement, moreover, more “liquid” assets such as equities and bonds do not involve managing tenants, repair workers and similar activities which involve high time/work commitments. Typically, a portfolio like this would involve meeting a financial planner once or twice a year, to keep your investment strategy on track.
Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:
020 8366 4400 or firstname.lastname@example.org