Thirty years ago, the idea of investing in a rental property seemed like a good idea, and that’s exactly what I did with some savings I’d accumulated from a stint working overseas.
But that was before the buy-to-let boom really took hold, house prices were significantly lower back then, and rental yields were decent — at least if you managed your property yourself.
But with decades of rising house prices, the market is getting squeezed and yields are lower. And the assumption that house prices will keep on rising needs re-evaluation. In fact, there are increasing fears of a sustained house price slowdown, or even a slump.
Squeeze
My colleague Robert Faulkner has highlighted a key point about the UK government’s approach to taxation — wherever politicians see people doing well, they can’t resist trying to squeeze as much tax as possible out of them. And the latest changes in buy-to-let taxation are making the whole sector look less and less attractive.
Even if you think a buy-to-let property might be good for a portion of your investment portfolio, I still think it’s a poor choice for retirement income.
In retirement, what you want is reliability, so a monthly rental income might sound like a very tempting prospect. And it could work out well as long as you have a good tenant who pays regularly.
But what happens if a bad tenant stops paying and you have to attempt an eviction? Not only has your monthly income from the property stopped completely, but you’re also likely to face costs in getting them out.
Or what about what happened to me once, when a tenant just left without saying a word — and took every portable item from the house with them. Not only did I have a rental void, but I also had to cough up for replacement carpets, curtains and more.
Options
In retirement, I also want the option of cashing in some capital from time to time as well as taking regular income. If my wife and I fancy splashing out on a little luxury now and then, and if it doesn’t impact our income too much, I’d like the ability to sell off a portion of my investments.
With a property investment, that’s not really an option — you can’t, for example, just sell off one room.
And then there’s the problem of maintenance. I’ve always managed it myself, but the older I get the less I’ll be able to do that. And I don’t want to have to spend a portion of my income on paying someone else to manage it for me.
No, my pension cash is all being moved to dividend-paying shares in top UK companies, with sensible but modest diversification.
Safety
Maybe one individual dividend might be cut if a company faces a squeeze, but I’m not going to see a 100% cut in income as can happen with a rental void.
And if I want a cash lump sum for some purpose, it’s easy to sell as few or as many shares as I need, instantly.
There’s also no management to worry about, other than perhaps a tiny annual charge levied by my ISA or SIPP provider.