From letting to regretting
Individuals have been obsessed with property for several decades. Is buy-to-let property really a substitute for a well-invested pension pot? Is it a sensible choice in the face of low yields from deposits? When one takes a closer look at the financial and emotional burdens of managing buy-to-let property, the case for property may be less clear cut than some imagine. Sensibly structured pensions invested in robustly structured portfolios have a central role to play in most investors’ retirement planning.
An ongoing love affair with property
The British public have had a long and sometimes unhealthy obsession with property, viewing it as a route to riches either through buy-to-let investments or as an ATM from which to extract short-term cashflow by extending cheap long-term mortgage debt on their residential homes.
There’s no doubt that many have made good money from buy-to-let investments which, as a consequence, has attracted many followers into an investment strategy that is often assumed to be a ‘sure thing’: buy a property, get a mortgage, cover it with the rent, take some extra income each month and sell the property for a big capital gain. If only it were so straight forward. Much of this success has been down to timing and luck.
At the same time, the general theme that ‘pensions don’t work’ has become quite pervasive in the media and has been exacerbated by both real and misperceived concerns about their value as a central pillar of a sensible retirement plan.
This article seeks to take a harder look at the reality of both buy-to-let and more traditional pensions and the investments that sit inside them. As ever in investing, there are no absolute right or wrong answers. There is certainly the need to make informed decisions that rely on hard thinking and hard facts, not just newspaper headlines.
I don’t need a pension plan, I’ve got property!
It is easy to see why buy-to-let can feel like an attractive option. We have all heard stories about other people’s buy-to-let success (rarely about the stress, struggles and failures of others). Instinctively we feel that we ‘get it’. There is also tangibility to property that does not exist with owning bonds and shares. In addition, taking on high levels of debt, as some do, does not feel that risky, as many people have experience having a mortgage on the home that they live in. As Anthony Trollope apparently once said:
‘It is a comfortable feeling to know that you stand on your own ground. Land is about the only thing that can’t fly away’
We are also prone to being seduced into the stories that back the case for strong rental yields in the future along the lines of a growing population, more people renting as first-time buyers struggle to get onto the property ladder and low supply. Yet yield is a function of price and prices are high. Finally, if the rent covers the mortgage, then what is the downside? Well, in reality it is material, as we will explore.
It is also easy to see why pensions have come in for such a bashing, not least because of the mis-selling scandals of the past that tainted their image. The throw away comments that you sometimes hear - that pensions ‘aren’t worth it’ or ‘don’t work’ - are misguided. After all, a pension is just a tax break from the government where you immediately benefit from avoiding paying 40% or more tax on the contributions you make (for higher rate taxpayers) and gain a tax-friendly environment in which you receive income and capital gains tax benefits whilst the money is in the pot. These benefits should not be dismissed lightly.
Others may perceive that pensions don’t work because the UK equity market has been disappointing over the past decade or so. Yet sensible investing is about spreading your eggs around a broad range of global markets and asset types. In fact, over the past 20 years the broad global markets have returned around 10% per year on average. That does not sound much, but it equates to doubling your money every 7 years, which by extension means quadrupling your money over 14 years[1]. Not bad!
Surprising perhaps, but that is the reality. A well-structured portfolio, as we will see later, did a remarkable job during an emotionally tough period for investors, that included three major equity market falls.
Thinking of starting a business?
Investors could be forgiven for thinking that buy-to-let is a substitute for holding cash deposits. Savers - many of whom relied on deposit income to top up their income - have been feeling the pinch of low deposit rates in recent years and that is before we consider the impact of inflation. In fact, over the past 20 years, the value of a saver’s cash has decreased in purchasing power terms by over 20%[2].
An urgent hunt for higher yields has pushed many into either riskier traditional investments, like low quality ‘high yield’ bonds and higher yielding equities. Others have turned to buy-to-let. The perception that moving from cash to buy-to-let is just a short step up the risk ladder is wrong. In reality, it is leaping from one end of the risk spectrum to the other, particularly if an investor is borrowing to buy the property.
When individuals enter the buy-to-let market, they are in fact starting a very highly geared (or leveraged) business with all the costs, tax and reporting issues and material risks that go with the territory. Successful buy-to-letting has to be run on such a basis if it is to avoid, or at least mitigate, the very material financial risks that it entails. Investors who go into the buy-to-let market without anything more than a naïve set of gross yield numbers, basic cost estimates and the hope of a rising market may not get the sort of outcome they are hoping for.
Borrowing to invest cuts both ways
How many investors would walk into their adviser or the bank and pronounce that they wanted to borrow up to three times the value of their investment portfolio to ‘gear-up’ their investments? Very few would probably be the answer, but those who did would most likely be quickly and politely shown the door. Yet for buy-to-let investors it is all ‘come on in, take a seat’! What seems like madness in one case is considered to be sane in the other.
Property investing provides an easy opportunity to leverage or gear up their capital. Most buy-to-let mortgages demand around one quarter of the value of the property to be put down as a deposit - if you buy a £200,000 house you can put down £50,000 and borrow £150,000. Obviously, you could put down all £200,000 if you have it and not borrow anything, of course. That choice will depend on the investor’s individual circumstances and risk preferences.
For those who go down the gearing route, the reward on their capital - and risk on the flip side of the equation - increases in line with the multiple of their capital that they borrow. For example, if the property increases in price by 20% over a period of time, the geared investor in the example above will make £40,000, which on their capital invested is a return of 80%. However, if the market declines by 20% they will lose £40,000 of their £50,000 capital invested. Borrowing to leverage your capital cuts both ways. It is also possible to lose more than the value of your initial capital e.g. a loss of 25% would wipe it out. This is the curse of negative equity.
There have been two big UK residential property falls since the mid-1980s starting in 1989 and 2007. Property values – after inflation – fell by around 30% on both occasions.
Table 1: Gearing magnifies losses – effect on £50,000 equity capital | Data source: Nationwide House Price Index. Bank of England UK CPI. All rights reserved. Red = negative equity.
The devil is in the detail – getting to the net yield number
Many investors, particularly those new to the buy-to-let market, are easily seduced by the gross yields that can be achieved on properties. Let’s run through a simple generic example. The average gross buy-to-let yield in the UK in 2025 is around 6% with an average rental of around £1,300 pcm, which in turn implies an average property value of around £260,000[3].
Let’s consider the costs of a buy-to-let investment. These come in three stages: initial purchase and set up ready for tenants; ongoing costs; and sale costs. Investors need to keep a tight record of all of these items for HMRC.
· Initial costs: initial purchase and set up include the costs of purchase that all homeowners know only too well, including stamp duty, and professional fees. The property may well need to be repaired and redecorated, white goods put in, new furnishings purchased - if it is to be let furnished - and gas and electrical equipment checked and certified. So far, so good.
· Ongoing costs: these break down into annual costs and longer-term amortised costs to cover longer-term maintenance items. Property is a naturally depreciating asset – it falls to pieces, over time, if not looked after properly - and you need to invest hard cash into it to maintain or grow its value. Annual costs include insurance costs for buildings, landlord cover, and utility and white good maintenance, perhaps. You also need a general maintenance budget that will scale with the property value for smaller items[4]. If you buy a leasehold building, then you may well have an annual service charge/sinking fund contribution to pay as well as the ground rent on the property. Many buy-to-let investors also use agents to manage the property to take some of the hassle out of it – 10% to 15% of the monthly rent is quite normal. There may well be void periods when no suitable tenants can be found. Finally, mortgage payments need to be made. At time of writing, a two-year 75% buy-lo-let mortgage rate would probably come in at around 4.5% p.a., with a hefty up-front arrangement fee[5].
· The longer-term costs that are often either overlooked or grossly underestimated include repairs to boilers, central heating and appliances or worn-out showers, cookers, carpets etc. – it is surprising how quickly rented accommodation begins to look shabby. The property will probably need to be redecorated every three to five years. Kitchens and bathroom may need replacing every five to ten years and don’t forget guttering, drains, roofs, wiring, drives etc. that need some long-term care and attention. Tired looking properties are hard to rent in an increasingly competitive and discerning rental market.
Scouring the internet, you can begin to get a feel for what these costs are in aggregate from those who have been doing this for some time. The best rule of thumb appears to be to expect to budget for around 30% to 35% of the gross income for all general ongoing costs, before mortgage repayments. Any income remaining after costs - most of which are allowable against tax - will be taxed at the investor’s marginal rate. From 2020 a tax credit of 20% of the mortgage interest was made available[6].
· Sale costs: Finally, if you sell the property you will have to pay agents fees and capital gains tax at the prevailing rate, although if the investor lives in it for a certain period of time, they may be able to deem it to be their primary residence, although that may not suit some investors practically, or morally.
So, when some basic numbers are calculated the true net yield is far less compelling than the news headlines. These basic calculations are set out in the tables below[7]. The example uses updated figures based on a buy-to-let, interest only property in Newcastle in 2024, given Newcastle had one of the highest gross yields in the UK last year[8]. Average rents in Newcastle sat at around £1,200 a month with average house prices of around £200,000.
The challenge for landlords to provide a worthwhile net yield in the current environment is evident, with rising rental rates of late unsurprising as costs are passed on to tenants.
Table 1: Assumptions – Newcastle, United Kingdom – 2024 estimates | Source: Albion assumptions and estimates 2025 – basic example only. UK Buy-To-Let Yield Map 2024 | Verta Property Group
Some buy-to-let advocates may dispute the numbers, and it is acknowledged that rental yields can vary quite widely across the UK, as do maintenance costs and occupancy rates. The numbers above are highly sensitive to inputs.
However, it is a reasonable framework for making better informed decisions. On these numbers, an investor with no mortgage would have received a net yield after tax of around 3% on their capital, which is about in line with current inflation rates.
What is interesting about the numbers in the example is that if the mortgage interest rate is raised by just 0.5% then the net yield after tax is near enough zero, before inflation. It is worth remembering that rents do not necessarily go up just because interest rates do. Those who lived through the property market slump of the early 1990s - suffering interest rates of 14% - still remember the pain of having to find cash from their own earnings to cover mortgage payments on their buy-to-let properties. The geared buy-to-let investor – in the worked example above - would have had to find £900 per month in 1991 to cover the rental shortfall to meet the costs and mortgage payments at 14%. Some also suffered a prolonged period of negative equity. It took over five years from the bottom of the market in 1993 to get back to the former peak, before inflation is taken into account. Many were forced to sell, creating a downward spiral on prices.
Given the very low net yields on offer today, buy-to-let is, in effect, a strategy reliant on price appreciation for its long-term success.
Putting our investors’ hat on
An astute investor will look at an asset class dispassionately and consistently, neither looking solely at yield or capital gain, but on a total return basis being the combination of the two. To make a better-informed comparison, and to try and level out the playing field, if we assume a generous net post-tax yield of 2% on an ungeared buy-to-let investment and add this to the price return of the UK house price series, we can get a rough picture of how it has performed against other more traditional investment portfolios. Costs of 1% per annum have been deducted from the traditional portfolios for fairer comparison. No initial set-up costs for the buy-to-let strategy have been deducted, even though these can be material. The outcome is illustrated in Figure 1 below.
Figure 1: Buy-to-let versus traditional portfolios – simulated strategies after inflation 1981-2024 |
Pensions offer valuable tax breaks
The valuable tax breaks that are afforded to those who make pension contributions are an important part of the capital accumulation process. At a 40% rate of tax, a £50,000 pension contribution is worth £66,667 on a gross basis. Rarely is the Chancellor so generous. It is free money. Most buy-to-let investors invest capital that has been saved from after-tax income.
Property and pension are not mutually exclusive
Property may have a place to play in investors’ wider wealth plans, perhaps through an allocation to global commercial property as part of a well-balanced and diversified traditional investment fund, or even held directly as part of a self-invested pension plan. Currently residential property cannot be held in a pension plan. Taking professional advice on what suits your personal circumstance makes good sense.
Perhaps the biggest risk of the buy-to-let market is the concentration of risk in not just one narrow asset class – residential property – but in one house or flat, on one street in one town. This lack of diversification is an unattractive attribute for a plan to deliver wealth and happiness in retirement.
Conclusion – pension funds are a core retirement pillar
It would appear that on an ungeared basis, buy-to-let is the ownership of a small business-like venture that holds a depreciating asset that needs constant love and attention in order to achieve a rate of long-term return somewhere between bonds and equities that one might expect. As soon as one takes on gearing, the risks multiply in line with the multiple of times the investor’s capital is geared, along with the potential rewards. The one thing that is certain is that it is a very big leap from the deposit-like alternative that many newspaper articles suggest that it is.
Buy-to-let is certainly not a quick or riskless road to riches. It has material costs and downsides unacknowledged by many who embark on such a course. It demands to be managed like a business with a detailed business plan and to receive the time and effort that such a small business deserves. For some that is an enjoyable past-time. For others it becomes a headache, a chore and a source of stress.
In our view, making the most of the tax breaks and investing assets in a sensibly structured, globally diversified investment portfolio makes enormous sense and should remain at the centre of any sensible retirement planning. What price can you place on the time that you free up to do the really important things that enrich your and others’ lives. Who wants to be at the constant beck and call of a tenant whose washing machine has broken down?
I hope you found this article inciteful. Feel free to share your thoughts or get in touch by the link below if you would like to discuss any aspect of this article or your wider financial circumstances.
[1] Vanguard Global Stock Index Fund (IE00B03HD209). Data to Apr-25 in GBP. Doubling your money figures calculated based on the ‘rule of 72’.
[2] Bank of England © SONIA and UK CPI. Data to Apr-25.
[3] ONS © Private rent and house prices, UK: April 2025.
[4] Recent data estimated maintenance costs in 2024 at an average of 0.5% of average UK house price. The Cost of Being a UK Landlord | Towergate Insurance
[5] Buy to Let Mortgage Rates | BTL Interest Rates - HSBC UK
[6] Tax relief for residential landlords: how it's worked out - GOV.UK
[7] For the financially astute it would make sense to calculate the internal rate of return that any buy to let property opportunity could deliver from all of the cash flows involved and to see where the risks and return truly lies.
