Passive Buy-To-Let: These Property Investments Return 25% With Zero Effort!

We’ve talked before about the incredible returns you can get from owning rental property in the UK. What we want to talk about today is that if you wanted to invest in property, paying to outsource all tasks to do with sourcing, owning and managing them doesn’t really harm your wealth – and may even increase it.

Too often property investors think they have to be active landlords, doing everything themselves. They manage the tenants, fix the toilets, and find their own properties with no surveying or construction knowledge, often resulting in expensive problems down the line.

Meanwhile, if you’re willing to outsource every task, it means that all you need to become a property investor is money, and a basic grasp of the finances. It doesn’t even matter if you don’t live near the property.

Being a landlord is a job. We’re saying, don’t be a landlord – be a property investor!

In this article we’re going to run you through an example rental property for sale right now in Manchester, and show you the expected income, costs, and Return On Investment with it being run as an outsourced investment, versus a self-managed one.

You might be surprised how little difference it makes to your wealth, compared to the time you get back – time that you could put to better use making money elsewhere!

Be sure to check out the new Find Me A Property service for those wanting our help with buying rental property.

Alternatively Watch The YouTube Video > > >

The Key To Any Investment: Make It Passive

An investment should not require much of your time in order for it to grow. The advantage of an investment like a stock market fund is that you can set it up and forget about it, and return in 30 years’ time to see how it did.

Most property investors meanwhile put way too much time into bleeding their assets for every penny of possible return – they’re tempted to micromanage because they have full control over the asset and are reluctant to spend any money.

Many fancy apps and websites have popped up to make investing in property more passive by pooling investors’ money together into funds, but they are no substitute for the magnified returns possible by actually owning physical buy-to-let property yourself with a buy-to-let mortgage. And, the assumption that buy-to-let property cannot be completely passive is wrong.

Example House In Manchester

Let’s start with a real-world example of an investment-grade house that’s on the market right now.

On paper, it ticks all the boxes for me in terms of location, size, price to rent ratio, and condition, but I would visit it first to make sure. If you wouldn’t have a clue how to find the right property, remember, you can outsource everything – even that.

Below are the numbers for this particular investment, starting with the house price and the mortgage. We’ve found Natwest and RBS mortgages offering a rate of just 1.64% on a 25% deposit, which is the industry standard deposit size for buy-to-let mortgages. The mortgages have a £995 fee, which you can just add to the loan instead of paying upfront.

Example Investment: The Passive Approach

Next is the breakdown of what you’d actually pay for this opportunity (Upfront Investment column), having outsourced all the jobs of finding and purchasing the house to professionals. The vast majority of the upfront investment is the required deposit. The rest is all set-up costs that you must factor in to work out your true return. If this looks a lot to you, we’ll look at what you can do about that shortly.

Then there’s the monthly bills you’d expect to pay (Bills column), which assumes an agent fee of 12% on the rent, the once-in-a-blue-moon agent’s fee for finding new tenants shown as a monthly equivalent, and monthly equivalents for safety certificates and insurance.

The bills feed into your Monthly Returns calculation. Rental income is expected to be a healthy £900 a month on this property, and knocking off amounts for mortgage interest payments, bills, maintenance and void periods, you get a pre-tax rental profit of £410 a month. Annually, that’s a 10% Return On Investment against the £51,350 original investment.

But rental profit isn’t everything – you also expect to get a sizeable capital gain. Assuming your £160,000 property will be worth £168,000 in 1 years’ time, based on a historic 5% average growth rate, that £8,000 gain is an additional 16% Return On Investment. Overall, despite not being a hands-on landlord, you’re making a 25% pre-tax ROI.

A 25% ROI is pretty tasty, and that’s based on the premise that you’ve taken out all of the nasty time consuming work from being a rental property owner. Let’s quickly add that time and effort back into the equation and see what difference it makes to your ROI:

Example Investment: Doing It All Yourself

The blue cells are the costs associated with outsourcing that you can change. Let’s set the upfront outsourcing and the monthly agent’s fees to zero and see where that leaves you.

We’d also expect voids to increase if you were doing it yourself, from maybe 1 month a year to 2 months a year, since professional agents will likely do a better job of finding and retaining good long-term tenants – it’s what they do.

Your ROI has increased by doing everything yourself, from 25% to 29%. There’s hardly any difference – both are epic returns! The question you need to ask yourself is whether that 4% difference is worth giving yourself a second job over?

Outsourcing Options

As a remote hands-off investor, you’re going to need to outsource a lot of tasks.

In the buying phase, you’ll need:

  • someone to find and view properties for you;
  • a surveyor to check the roof, walls, windows and so on;
  • you may even want to use a mortgage broker to find you the best mortgage deal.

After purchase, you’ll need:

  • an agency to keep your house filled with tenants and answer the phone to all their problems;
  • maintenance people of all manner of trades to fix boilers, replace tiles, keep the paintwork fresh, perform safety inspections, and so on;
  • ongoing contact with mortgage brokers and insurers.

It pays if all of this can be coordinated.

Some property agencies will do that for you. They’ll find you an investment-grade property, arrange the mortgage, the solicitors, the surveyor, and the insurance, find you tenants, manage the tenant relationship, organise maintenance and ensure you don’t fall foul of safety regulations.

The only jobs for you to do are speaking with your agent, signing any paperwork, and having the final say on any expenditures.

We now have such a service on MoneyUnshackled.com. Head over to the Find Me A Property page and send us a message using the form there if you want help buying and managing a rental property.

Our trusted property sourcer can find you the same kind of house that I myself invest in, following the same strategy outlined above of cashflow plus capital growth.

They’ll hold your hand through the buying process, discuss investment strategy with you, tailor a plan for your needs, and crack on with finding you that perfect opportunity.

Why Property Works As An Investment

Property is such a solid investment for 3 main reasons: the way it’s financed, the stability of the market, and the cash flow.

These investments work so well because you’re using an interest-only mortgage to buy your property with. If you had the incredible good fortune to be able to buy outright with cash, you’re ROI would plummet from 25%, to 9%.

A 9% return is still good, and is comparable to the stock market – but the property returns are only so high in our examples because I knew how to find a very good investment-grade property.

Most people wouldn’t know how to do that. That knowledge gap is why many landlords are being forced out of the market right now due to either making losses, or profits that are too small to justify the risk and effort. But regardless, financing a property right should magnify your returns.

Historically, the property market has been extremely stable in comparison to the stock market, due to the nature of the asset – ordinary people need to live in them, and there’s always more demand than supply, so it’s very rare for prices to crash.

Property vs Stocks: Price Movements

Above are the last several years for example – stock prices move wildly, while property moves much more smoothly. While price instability isn’t a major concern for a long-term strategy, a smooth gradual upward price journey can be reassuring to more risk-averse investors.

Finally, the properties we’re looking at here cash-flow very nicely, with over a third of the profits being cash in the bank as opposed to theoretical capital growth. You can spend that money on your lifestyle, or to replace a job income, or to easily reinvest into more assets.

The Most Common Worries Are Easily Solved

The main downsides to buy-to-let are government meddling, tenant issues, and the large upfront investment amount required. Looming interest rate rises are also a common worry.

Let’s quickly deal with the first ones – keeping on top of ever-changing government regulation and tenant issues. These are both easily resolved by employing a property agent to run the day-to-day for you. Using a good property sourcer will also allow you to avoid buying a house in the first place that will need expensive renovations to meet upcoming law changes.

Off the top of my head, there’s a big one coming in 2030 that states that all rentals must have an energy rating of C or higher – not many older properties will be up to code without a fair bit of expenditure on insulation. The trick is in finding the good ones, or spending money smartly to improve the ratings just enough.

But the government comes up with new doozies like this all the time to keep landlords on their toes. Having someone on the end of the phone to advise you is invaluable.

Next, the upfront investment amount is typically a huge hurdle for most people. There are ways to effectively borrow more on your home residence to free up spare cash, called equity release that we’ve discussed previously, that a good mortgage broker will be able to help you arrange. Or you can go halves with a mate. Or you can even keep buy-to-let as an aspiration that you have on your radar until you’ve saved up enough.

Will Returns Continue To Be 25%?

That 25% we quoted for a passive investment was of course based on the current market, and a lot can change. But that doesn’t have to mean “change for the worse”.

Rents are skyrocketing right now, which is great for existing landlords, and helpful for new investors to the market as increasing rents offset the increases in property prices to maintain a high ROI. And if you jump into the market now, you can hopefully continue to ride the wave of rental price increases for years to come.

One big turd in the punchbowl though is interest rates. We don’t believe interest can rise all that much without every homeowner with a mortgage in the land being instantly bankrupted – not to mention the government’s own debt, who’s interest payments would rise by a painful £25bn a year for every 1% rise in interest rates.

The Bank Of England knows this, and will not want to take a course of action with interest rates that will sink the whole country.

Using the same logic as before, if rates rise by 1%, the 25% ROI drops to 23%. If we raise interest by 2%, ROI drops to 20%. If we raise interest by 3%, at which point the whole country is probably bankrupt, your ROI drops to 18%. The country may be screwed at this point, but you’re probably doing ok – thanks in part to the capital gains.

We think steady house price growth is still a reasonable expectation for the long-term going forwards. During the high-interest 1970s and 80s when the Bank of England base rate for interest peaked at 17%, house price growth was frequently in the double-digits. And in entirely different circumstances, in the 12 months to September 2021 houses have grown by 10%.

‘Property Investors’ Are Richer Than ‘Landlords’

Finally, if you’re still not sold on outsourcing everything, think about the money you could make with the time saved from not having the second job of being an active landlord.

They say time is money, and if you’re saving hours a week, there’s other stuff you could be doing to increase your income beyond having a property administration job. Or you could just, you know… enjoy your free time!

What do you think about outsourcing everything to do with property? Join the conversation in the comments below!

Written by Ben

 

Featured image credit: ranjith ravindran/Shutterstock.com

Also check out the MoneyUnshackled YouTube channel, with new videos released every Wednesday and Saturday:

Recommended Posts

No comment yet, add your voice below!


Add a Comment

Your email address will not be published.