10 Buy To Let Advantages (Why I Love Property Investing)
There was a time when investing in property was a no brainer. Year on year double-digit growth and easy access to finance made bricks and mortar an obvious choice.
But then came the 2008 recession, and the subsequent market crash and restriction on lending. And more recently, we’ve seen the introduction of stamp duty, the removal of mortgage interest as a deductible expense, and increased legislation for landlords.
With the latest changes and further government intervention to try and cool the housing market likely, is buy-to-let still a good investment?
Well, despite all the recent changes, I still think BTL is the easiest way of growing your wealth and income (if done correctly). If you need a little convincing, here are ten advantages of buy-to-let that will help to restore the faith.
1. Easy To Leverage
Leverage is hugely powerful. It’s the main reason I prefer property over shares or other investments.
Getting a mortgage to help fund the purchase of a BTL property is fairly easy, and it will allow you to buy significantly more property than you could otherwise afford, which amplifies your returns.
For example:
Let’s assume you have £25,000 to invest and are torn between shares or property. Both asset classes offer high growth and will double your investment in roughly 10 years (it’s not quite as straightforward, but play along with me for this example).
If you invested £25,000 in shares, in 10 years, you would have £50,000. Not bad. But if you used your £25,000 as a deposit to purchase a £100,000 property, you would have an asset valued at £200,000 in 10 years. After paying back the £75,000 mortgage, you’d be left with £125,000!
£25,000 Vs £125,000 profit – I know what I would rather have.
That’s the power of leverage by using a mortgage to purchase a buy-to-let.
BUT… as great a tool as leverage is, you must use it with caution. It’s a double-edged sword, and if you’re leveraged investment declines, your losses are also magnified.
That said, property is a stable asset (values don’t fluctuate wildly day-to-day like stocks) and relatively safe, especially if you’re putting in a 25% deposit – the market would need to decline by 25% for the banks to be at risk of losing their capital.
Now, it’s possible to buy shares with a loan (a.k.a on margin), but it’s extremely risky due to their high volatility. The world’s largest companies and the global stock markets regularly experience corrections of 5% or more in a day, and have crashed as much as 22% in a single trading day in the past!
2. Control Over Your Investment
With property, you have direct control over how you manage your investment. Every detail – such as the area you invest in, the property type you buy, who your tenants are and even the colour of the paint on the walls – is yours to decide.
Your level of involvement is also a choice.
If you decide to become a landlord, property investing is much more like running a small business. But you still have the flexibility of outsourcing anything you don’t like while doing the parts of property investing you enjoy or are skilled at (and paying yourself for it).
I choose the landlord approach, and I pay myself to manage the tenancy and carry out repairs. It’s more profitable, but it takes more time.
Or, you can be a “hands-off investor” and hire professionals to oversee everything from the refurb to the day-to-day management of your portfolio.
But no matter which route you take; you’re the boss. You call the shots.
Compare this to the sharemarket, where you hand over control to a board of directors and company management. You’re trusting your savings to a business and hoping that the people running that business can keep growing it (and your investment).
Call me a control freak, but I like to have a little more influence over my investments.
3. Opportunity To Add Value
After you purchase shares, bonds, gold, artwork, or other investments, there’s not much you can do but let the market do its thing. With prudent investing – and maybe a bit of luck – the value of your investment will rise in time.
But with BTL, there’s an opportunity to add immediate value through renovations.
Improving the property may be as simple as giving the place a lick of paint, or it could involve changing the layout to add a bedroom or building an extension.
If your handiwork increases the value significantly, then it’s possible to remortgage the property and take your money back out of the deal, allowing you to keep using the same pot of cash to grow your portfolio.
4. Purchase At A Discount
Not only is it possible to add value to a property by refurbishing it, but you can also purchase property below its market value, locking in a profit from day one.
Some may argue that buying property for less than it’s worth isn’t possible as whatever price you paid for the property is, by definition, its market value. However, that would assume that sellers are completely rational and will hold out until they get the best price possible for their property.
NOT TRUE.
Sellers are human beings and are therefore influenced by their emotions and personal circumstances.
A homeowner may sell their property for less than its true value because they’re going through a divorce, a family member has passed, they’re moving location, or they’re experiencing financial difficulty.
But more often the case, it’s because they haven’t kept up with regular maintenance and redecorating work. You can buy property 20% or more below market value just because the interior is dated!
A quick spruce up, and you’ve created equity that can be realised when you sell the property, or immediately if you decide to remortgage.
My best discount to date is 29%. The property hadn’t been redecorated in several decades and smelled like an ashtray, but the bones were good:
5. Passive Income – the Holy Grail!
Passive income was what first lured me to property. But here’s the straight-up truth; the income I receive from my property portfolio is far from passive.
I have to work in my business to keep it operating smoothly.
Now, I may only work a couple of hours a month if all I have to do is check rents and reply to emails, or it could add up to several days if I have to fix something.
Even if you use a letting agent, you’ll still have to check payments, inspect quotes, keep on top of accounts and do general admin work.
So, although not 100% passive, buy-to-let income still comes in with very little ongoing work – it would probably be better described as residual income.
And the amount of income isn’t pocket change either, with a typical buy-to-let property able to clear £250 per month after all expenses.
This cash is yours to do with as you please. You could pay down the mortgage, save for another property, invest it elsewhere, or use the money to pay for a holiday or any other lifestyle purchase.
Acquire enough of these cashflow-ing properties, and you’ll eventually have enough “passive income” to replace your salary, allowing you to quit your job and become a full-time property investor.
6. Long-term Capital Growth
Rental yield is not the only means of profiting from buy-to-let. In fact, the cashflow you receive from renting out a property may be dwarfed by its rise in value over time.
According to the UK House Price Index, property values have risen 9% per year on average from 1970 to 2020.
Although this is the average appreciation across the UK and doesn’t take account of regional variations or the performance of specific property types, it shows that the general trend of the property market is up.
But before you buy any old shack and wait for the market to make you a millionaire, there’s a couple of things to note with capital growth:
- It’s not guaranteed. We may not see property values appreciate at the same rate as in the past or at all. To borrow an over-used phrase from the investment industry: “past performance is not a guarantee of future performance”.
- It’s not steady. The property market is subject to booms and busts. Property prices can shoot up by 20% in boom years, and then fall just as spectacularly in the crash.
Personally, I don’t pay too much attention to capital growth. I think of it as the icing on the cake; your reward for being a patient investor throughout the years.
7. Sustainable Business Model
So long as Elon Musk doesn’t colonise Mars and we’re all not living in bubbles, there will always be a demand for property.
The business of providing housing is not a fad, and it will continue to operate for the foreseeable future.
And with a growing population, land scarcity, construction of new homes not satisfying demand, and a trend to viewing renting as favourable as it allows flexibility, the need for buy-to-let is set to continue.
8. Tangible Investment
Property is a physical asset, which you feel much more connected to than other investments.
Unlike investing in shares, where you click a button and “poof”, your money disappears into the market, owning rental property is a very REAL experience.
You can drive by a rental you own and see your savings hard at work. And investing in something that you can physically see and touch is much more reassuring.
Besides antiques, collectables and classic cars – which aren’t really investments – no other asset gives you that.
9. Property Is Something We Know And Understand
The fundamentals of property investing are simple: buy a house, find a tenant, collect the rent. But why I think property “clicks” with people more than other investments is because the underlying asset is part of our everyday lives.
We all live in houses, which develops skills and knowledge in property, perhaps without you even realising it.
Just by living in a town, you’ll get to know property values, cheap and expensive areas, and good and bad neighbourhoods.
If you’re a homeowner, you’ve no doubt picked up knowledge on mortgages, refurbishment and DIY, and maintaining your home.
And if you’re a renter, you’ll know where the hot spots are, where’s cheap to rent, the standard of rental accommodation in that area, and that there’s legislation a landlord must comply with.
Although you may not think it, all of this “experience” gained from living in our homes builds up a databank of property knowledge and skills.
When it comes to investing in bricks and mortar, our generalist knowledge makes it easier to understand the nuts and bolts of buy-to-let.
10. Infrequent Market Updates
Due to the way property sales data is collected and processed, house prices lag what is actually happening in the market by several months.
Although not immediately obvious, this is actually a massive benefit.
Think of it this way; if someone chapped your door every 30 seconds to tell you how much your house was worth, you might be tempted to make a rash decision that doesn’t align with your long-term plan.
Not having live market updates is especially beneficial during a downturn, where the value of your property may have fallen, but you aren’t certain by how much. The only way of knowing for sure would be to sell up.
But as long as you’re still collecting rent, there’s no reason to sell.
Just sit back, tune out negative media, keep banking rental profit, and wait for the eventual upswing.
Wrapping It Up
Property makes more millionaires than any other type of investment. If you study the richest people on the planet, you’ll find that many of them either built their wealth through property or choose to store a large portion of their wealth in property.
And despite the glory days of property investing being over, the advantages of buy to let still make it a sound investment for those looking to create a second income and benefit from capital growth.
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