Take a quick look at the UK buy-to-let market and you might find it tough to understand exactly what it is that makes it so very popular. Dealing with tenants is difficult and boring. House prices have a horrible tendency to go down as well as up (Londoners — ask anyone living in the north of England about this). And rents have long been so low relative to prices that getting a worthwhile net yield is all but impossible after costs.
Given this, you might wonder, why on earth would 14.5 per cent of all mortgage lending in the UK in the third quarter of last year have been to buy-to-let investors? Good question. The answer (as is the case with everything to do with modern money) is that it is all about leverage.
The idea in the mind of the average amateur buy-to-let investor — as I understand it from 15 years of reader emails on the matter — is that as long as you are cash-flow neutral each year (i.e. it costs you nothing) all is well. You’ve put down a deposit. Someone else pays the mortgage via their rent and at the end of 20 years you have a house — for which you have effectively paid nothing but the deposit (assuming you price all the time spent dealing with tenants and admin at nothing). So the two things most investors care about most — yield and capital gains — aren’t particularly relevant. As long as you aren’t forced to sell when the house price is lower than the sum of your deposit, the stamp duty you paid and the remaining mortgage; and as long as the net rent covers the mortgage every month, you’ll win in the end.
But here’s the thing.
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