This reply was originally found on UKDNF, and was in reply about buy-to-let as an investment option.
I'm pretty sure this isn't the entirety of what was written, but it gives a bloody good gist of just how good buy-to-let can be as an investment option.
I can't remember the name of the original poster, so if you know who it was and they are here, please point me in their direction and I will attribute to them appropriately.
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I've invested in many different things over the years, some very good, some bloody awful! My best investments in terms of % return are undoubtedly domains. The greatest was a website I bought about 18 years ago for £4k which after revamping the site made me over £1m in ad revenue in about a 5 year period. Some other domains I bought off various old Acorners also yielded fantastic returns in those days. Alas it's not so easy nowadays! Domain catches and flips from Domainlore, Snapnames etc can of course give an astronomical profits in percentage terms. I've had a small number of 5 figure sales and quite a lot of 4 figure ones over the years from catches. These strokes of luck don't really come often enough to add up to a life-changing amount of money but are very nice bonuses when they happen!
Property
In recent years I have been investing in property and have become a landlord. I like this because it's a decent dependable income and substantial wealth is built up in the background as the properties go up in value. I started in 2020. I found myself with a large cash balance having just sold my second home in the country. I could see that with the £hundreds of billions the government was blowing on all kinds of nonsense when they were terrorising the country, there was going to be a big wave of inflation round the corner. In such times, if you do nothing cash in the bank will quickly evaporate as savings account interest rates are much lower than inflation, wiping out big chunks of your savings. Although I do own gold, IMO Property beats gold because you buy it on margin with a mortgage so you stand to gain the full uplift in the property's value, but you only have to stake 25% of the funds to buy it. So if both appreciate more or less at the same rate, the property will be 4X the return + rent as well. Gold is important though and I'll get to that below.
2020 seemed to me an ideal time to invest in property as you could get 5, even 10 year fixed rate mortgages at just over 2% and the government even cut the stamp duty temporarily, no doubt so the ruling class could take advantage of the situation (although you do have to pay an extra 3% stamp duty for investment properties).
I bought 4 rental properties in Cambridge where I live. I chose properties which I thought were a good price but were in good areas (to reduce hassles with noisey neighbours/ burglaries etc). I got three of the properties at a discount compared with recent sales on the same road because they needed a fair bit of work, but the renovation costs worked out about half what the discount was so they turned out to be bargains. I put in good quality furnishings and decent brand appliances so I could charge more rent for a higher standard offering and attract a better class of tenant.
One property I also made some alterations to. It was a 3 bedroom house with an integral garage so we converted the garage into a 4th bedroom. This is relatively easy to do and only cost about £7-8k but it will have added at least £400 per month to the rent, so it's an excellent investment within an investment. Also because the house had a separate toilet from the main bathroom and this was next to the master bedroom, with a bit of wall-moving and jiggling about we were able to turn it into an en suite for the master bedroom, making the property significantly more appealing to tenants or if we sell in the future to purchasers. New kitchen, new bathroom, new flooring, new central heating system, a few new windows and a complete redecoration. Purchase cost: £393k, spent £40k on renovation and estate agent valued it at £550k when we had finished 6 months later. It's a really lovely house now and very profitable in terms of rent. Also came with solar panels which I may nab for myself in the future.
Within a year and a half the 4 properties went up 20% in value mainly due to the uplift in the market but in part due to the renovations. This nearly doubled my investment because I bought the properties with 25-30% deposits. Including the rental income on top of that I more than doubled my money in about the first 2 years. I use a letting agent to fully manage the properties and deal with all issues. They have been very good and managed to rent all 4 properties out at a higher rent than I expected, more than covering their own fees. All tenants have been professional or post grad Cambridge University students, not likely to jeopardise a bright future with not paying rent etc. Since then there have been periodic rent increases on top as well. Most months there have been no issues or extra costs arising from any of the properties. Every few months something does crop up but the agent handles it and usually it's under £100 to fix. No regrets so far.
I would say the opportunity is not really there at the moment. The ideal circumstances for property investment are low interest rates and rising house prices. The interest rates are double what they were, which would eat into the rental income and property prices have been pretty stagnant the last year. There is no doubt the current higher interest rates are holding the market back at the moment. Rents are still increasing though and this will gradually absorb much of the higher interest rates while they last. The housing market has always gone in fits and starts. If you can get in in a favourable part of the cycle you can get off to a good start but long term it's a winner no matter when you get in.
One other point I would make is that it's not true that you have to sell an investment property to reap the benefits of it going up in value. When you remortgage, the property will likely be worth more due to the rise in value since you last mortgaged it. Property prices on average have nearly doubled every decade so over periods of years there can be really significant increases in equity sitting there. When you come to remortgage you can "withdraw" the equity you have gained from price increases by mortgaging 75% of the property's present value. E.g. you buy a property for £400k with a £100k 25% deposit. 10 years later it is worth £800k. Your existing loan is still £300k, so you now have £500k equity instead of the £100k originally invested. Since the property is worth £800k and you must leave 25% deposit (£200k) as deposit for the new mortgage, you could remortgage with a £600k mortgage on it (as long as the rent covers the interest and a bit extra). £300k would be used to pay of the old mortgage and the other £300k can be withdrawn as a nice bonus for you. It's tax free too because it is technically a loan rather than earnings, and the tenants are paying the interest on that loan in perpetuity for you with their rent. It's no different to the original mortgage that you took out, you put in 25% and the bank lent you the rest. It's just now because of the equity that inflation has gifted you, there's £300k extra that can be taken out. This is how many landlords have ploughed their increasing equity gifted by inflation into new deposits enabling them to buy more and more properties.
GreyWing you mentioned you expect interest rates to go to 10%+ in due course and this is a risk for BTL mortgage holders. That is possible, but this would push up rents as landlords try to cover the higher interest rates. This has already been happening in the last few years, so landlords are at least partially protected from this threat by rent increases. But landlords should certainly have a reserve fund from which to dip into to ride out the storm. Politically, double digit interest rates would not be acceptable as potentially millions of home owners would default on their mortgages or go bankrupt. It would be the end of the ruling party if they stood by and allowed that to happen to a big chunk of the electorate. Also for interest rates to go anywhere near that level, inflation would have to be wildly high in double digits. If that were the case property values would go through the roof. We'd be back in
the 1970s again when the average property price went from £4k at the start of the decade to £19k at the end. The effect of this would be an investor's dream - the inflation would very quickly pay off the property for you e.g. if you put down £1k in 1970 to buy a house with a £3k loan, by the end of the decade you have a £3k loan but £16k in equity. And by then the pound would be worth 1/5 of its former value so rents would be much much higher, far exceeding the mortgage payments on that now rather small looking £3k loan. You would have become 3.5 times as rich as you were at the start, owning 84% of the property rather than 25%.
