Fresh from my year abroad in 2013 it got me thinking... is it a profitable endeavour to buy property, rent it out then live abroad on the income from said property?
OK let's crunch some numbers...
I bought my UK property in 2006 for £113,000 (at the time that was around $190,000).
First lesson of this story is that property in small crowded Western countries like the UK is EXPENSIVE!
Anyway, the good news is that within a week of buying the property, I found my first tenant. He was a tall guy with an Asian girlfriend. I never met his girlfriend, so maybe she was imaginary.
In 2006 the economy was good, rental property was in short supply and I pulled in £525 a month in rent from the guy.
|Even tiny 1 and 2 bedroom apartments are highly sought after in the UK's property market|
I did have some expenses - I had to put white goods in the kitchen (£780), get a handyman to fix up some stuff (£176), pay £1410 to a lawyer to carry out the property transaction and £329 to get the place surveyed.
After that the usual monthly expenses were £62 for the property management company to let out and manage the property for me, and £56 a month to the condo management company to maintain the communal areas, and £50 for ground rent to the leaseholder.
So in the first year my new property investment had yielded 1.9%.
Things went better in the second year. The tenant agreed to stay another year, and even agreed to pay £10 a month extra in rent. Nothing went wrong with the property and I achieved a 4.1% yield.
So far, so good, but into the third year and the hazards of investing in property quickly became apparent...
First the heating element went in the water heater, and that cost £90 to fix. Then the tenant decided to move out. Unfortunately his timing coincided with the worst of the 2008/09 financial crisis and it took me 2 months to find another tenant. At the time there was also a glut of rental property on the market, and I had to pay a lot of money up front to a property rental company in order to secure a new tenant, as well as to slash the rent to an enticing £475 a month.
The result is that in the third year of owning the property my yield slumped to 2.1%. Sheesh, I'd have earned more than this on a checking account.
The good thing to come out of the financial crisis is that my mortgage rate was slashed from 6.14% to just 2.5%.
I'll point out that the yield figures I'm quoting here assume I didn't have the additional cost of having to borrow money to buy my property. But in reality, I do have a mortgage.
Really if you do the math then it's just not feasible to borrow money to invest in enough property to go and live abroad on the income.
Fast forward to 2014 and I still have my rental property. The amount of rent I receive has been edging up, and I'm now effectively mortgage free.
But even now if you do all the math then I wouldn't say that it's worthwhile to buy UK property and rent it out while you go and live in Thailand on the rental income.
There are just too many people interested in UK property investments these days. Older British nationals are deciding to invest more in rental property, plus there's been a huge influx of foreign cash, especially into prime London property.
However, if I haven't put you off property investing then my new site BTLFinder.com contains yield statistics for the entire UK property market.
There are other ways of investing in property though. There's lots of overseas property out there, some with very attractive yields. However, there is more geopolitical risk, not to mention currency/exchange rate risks.
Repossessed property and property auctions can be a good place to pick up lower priced (and hence higher yielding) property. But these are only for more sophisticated investors, and it's less likely to be able to get a mortgage for properties bought at auctions.
There are also dangerous scams out there, especially with new build properties as well as other real estate investment opportunities such as land or woodland.
As to my own investment strategy, I'm leaning towards buying high yielding mutual funds. There are plenty of investments out there yielding 6 or 7%, and in the financial crisis I was picking up stuff yielding between 10 and 14%.
But with all investments, timing is everything really. Maybe the best thing is to start investing in property when you're in your 20's, then enjoy a bumper rental income in your 40's. But how many people think that long term these days? Plus if you can't resist the lure of marriage, then there's the risk of your future ex-partner running off with half of your property assets...