Does investing in property still work as a retirement plan?

The tenant fees ban is just the latest example of the UK government making life uncomfortable for private landlords. Research suggests that those with just one investment property are increasingly dropping out as a result, so is property still a viable option when it comes to planning for the future?

By Steve Smethurst

Private landlords are feeling the squeeze. The English Private Landlord Survey for 2018  tells us that 45% of landlords have just one rental property but, since 2010, the proportion of landlords with just one property has fallen from 78% to 45%. The survey also found that of those landlords planning to sell some or all of their properties, 61% said legislative change was the reason.

Landlords have clearly had a frustrating time over the past couple of years, with a tenant fees ban just the latest in a long list of challenges  that includes Stamp Duty increases, tax rules that prevent landlords from offsetting mortgage interest payments against their tax bill and tighter lending criteria on buy-to-let mortgages.

Uncertainty the biggest issue

Wayne Chen and his wife started to invest in properties nine years ago as, with two young children, they wanted to build financial security for their growing family. 

"We wanted a safety net in case something unexpected happened," explains Wayne, who lives in London. "But part of it was also to build a portfolio that could be used as a retirement fund."

The couple employ a team to manage their portfolio and he acknowledges that they have benefited from the recovery of the property market since the 2008 financial crisis. The problem, says Wayne, is that so many challenges have been thrown at landlords, some of which – like the tenant fees ban – have had unintended consequences that have taken up more management time and increased costs. 

"We are already experiencing higher drop-out rates and an increase in failed applications," he says. "We've held rooms or had people in a chain waiting for other moves and a failure in that chain costs far more than the one-week holding deposit we are now allowed to charge."

Fortunately, their property portfolio was set up with the assumption that they would face higher tax and increased costs. "Financially, we've been resilient through these changes," says Wayne. "These are the costs of doing business and it's the business we've chosen to be in. However, for me, the biggest issue is uncertainty about what's coming next." 

"You can't keep changing the rules. At some point the business model stops working. If every year the government throws something new at you, how can you plan for the future? Buy-to-let is a long-term investment, you can't do it for a year, you have to be in it for the long-haul."

Has Wayne considered selling and moving the money somewhere else? Not yet. He feels that property is still a good asset class with strong underlying security and allows the investor many ways to add value and improve the asset. 

"My feeling is that professional landlords are generally taking a ‘wait and see' approach especially as now isn't necessarily a good time to sell. However, I would imagine that landlords who were less prepared for these changes could be feeling trapped."

Alternative strategies?

Maria Nedeva, the creator of the www.themoneyprinciple.co.uk and a business school professor, also has strong views about property as part of a retirement portfolio. These are not a result of the changes that have hit landlords recently. "For me," she says, "these actually make very little difference when it comes to investing in property. All they do is increase the cost and hassle."

Maria, an award-winning blogger, has long-standing misgivings about property as an investment and is keen to suggest other options. She takes the view that it is capital intensive, illiquid and prone to hassles. As such, it's not necessarily the best investment unless, like Wayne, you are able to outsource the management and maintenance. 

"It's not passive," says Maria. "It's quite the reverse. Most people I know with properties don't do it at the necessary scale and therefore spend a considerable amount of time fixing things themselves or sorting out repairs.

"Another factor is that you can never guarantee a certain level of occupancy. It might be 70% or 30% occupancy, which increases uncertainty and hassle. And if you're unlucky with your tenants, you can spend a third of what you've charged in rent putting things right. Why would you want all this hassle for a maximum return of 4% at the moment?"

Maria suggests that if people are looking for an alternative as they look to diversify from a reliance on stocks and shares – then crowd-funding platforms might offer a solution.

"We have stakes in several houses through one of these, it's is a peer-to-peer lending company that buys liquidated buildings, updates them, then rents them out, eventually selling them. 

"For us, it's more of an experiment than a serious investment, but it's been paying out a reasonable dividend and it's absolutely no hassle. The drawback is that you don't know when the property will be sold so it's unlikely you'll make a lot of money."

Obviously, as with all investments, past performance is no guarantee of future returns and the value of your investment could go down. She also points to Innovative Finance ISAs (IFISAs), which offer the potential of up to 8-10% return per year, but you would need to lock in your ISA contribution for a fixed period. This is a third type after cash ISAs and stocks and shares ISAs.

"My personal preference is for digital wealth managers . It is also worth looking at peer-to-peer platforms that offer ISAs." 

Time for a ‘brake' clause?

But what about the humble pension? Clearly the days of final salary schemes have gone, but should people still make use of them? "Yes," says Maria, "and you should start as early as possible. Auto enrolment plays a big part these days; it is important to check for any employee benefits ¬– certainly never leave money on the table. If you employer makes matching pension contributions, make sure max your contribution."

In the meantime, the Intermediary Lenders Association (IMLA) has called for a moratorium on any further government intervention when it comes to private landlords. IMLA executive director Kate Davies says that government intervention has adversely affected small-scale landlords' ability and appetite to invest in properties over recent years.

She says: "Increased tax and regulatory responsibilities are increasingly dis-incentivising landlords and the number of one-property, buy-to-let investors has fallen by almost half. We have repeatedly called for the government to put the brakes on regulating and taxing our nation's landlords."

It would seem that without a more moderate approach or a clearer long-term plan from government, those relying on property as a retirement plan will face a worrying time as they assess their pot for their later years.

Thinking of investing in property to fund your retirement?

  • Read up on the laws affecting landlords so you can work out potential returns 
  • Consider if the property will be managed by a third party or if you will be doing maintenance yourself
  • Research landlord insurance
  • Don't neglect your pension. Property values and rules affecting landlords may change
  • Consider other types of investments like stocks and shares ISAs and Innovative Finance ISAs