Getting a dream tenant for their buy-to-let is, well, the dream of most landlords.
A tenant who pays on time, tidies up, and refrains from crack parties on a weeknight will make landlord life so much easier
Investing in property isn’t like buying an index tracker. Property is much messier. Buildings and their inhabitants can let you down.
Indeed the consensus around places like Monevator is that buy-to-let is more hassle than it’s worth. Property investing is for the Homes Under The Hammer crowd who don’t know any better.
And I’d agree its glory days are behind us.
But where I differ from many of the Monevator faithful is I’m not leery of real estate as an asset class. Nor of having a stonking big mortgage.
Despite my love of the stock market, I’ve long believed owning your own home is the best investment the average person makes.
Homes are typically bought with a mortgage. That mortgage is a forced saving scheme that gets the average person socking away money for 25 years. The mortgage also leverages up an initial deposit, hugely boosting the returns from even modest house price growth over the long-term.
Mortgages are a major reason why most of the Haves Have, while the Have-nots are still renting.
Mortgage is an eight-letter word
Despite these dreamy qualities, mortgages get the same cold shoulder as buy-to-let from many seekers of financial freedom.
Indeed there’s a band of Pay Off You Mortgage First militants who show up whenever you mention the M-word on the Internet.
Presumably there’s some kind of bat signal. But it must be pretty targeted, because while YouTube is flooded with heavily-viewed and Liked videos urging you to continually remortgage and re-up your buy-to-let empire, I get taken to task simply for not immediately paying down my big interest-only mortgage the first moment I’ve got some spare cash.
Now, I do get where the anti-mortgage brigade are coming from.
A mortgage – like all debt – introduces risk.
Mortgages are usually cheap and they’re secured against an asset (your house) and today most banks bend over backwards before repossessing.
But you’re still more vulnerable with a mortgage than without.
When I took out my mortgage, I admitted to a friend it was the first time I’d felt nervous about money in decades. Because it was suddenly possible for me to concoct a (far-fetched) scenario in which shares went to zero, my house plunged in value, too, I lost my income, and I was left bankrupt.
Whereas in my debt-free Bohemian days, bankruptcy was impossible.
It’s true, too, that paying off a mortgage delivers an instant, known return.
Pay down £50,000 of your mortgage and you’ll definitely save all the interest you would have otherwise have paid on it.
That’s a precise return. None of the ups and downs of the stock market, and usually more attractive than the fluctuating returns from cash at the bank, too.
There are even tax benefits to paying off a mortgage versus saving cash.
You’re your own landlord
All this came to a head recently as I wondered what to do with a six-figure lump sum I’d conjured up by
panicking prudently realizing some capital gains before the last Budget.
But for me, not paying off my mortgage – and investing the money instead in other assets – still seemed to offer the best balance of risk, reward, and a simpler life.
I mean a simpler life compared to potential buy-to-let headaches, of course.
And my conclusion was hugely enhanced by knowing that I would never find a dream tenant for my buy-to-let who’d be as good to me as … me.
You’re a dream tenant
As a home owner, I effectively rent my house to myself.
This isn’t a fanciful metaphor. There’s a concept called imputed rent that we need to get into some day, which represents the housing services you enjoy by living in your own home.
Some countries even tax homeowners on this notional rental ‘income’.
So yes, I am a landlord already – and my property has the perfect tenant:
- I look after it like nobody else would.
- My rent is never late.
- In fact, I’ve done a deep dive on myself and my financials are spotless.
- I love the furniture, the garden, and the area. I’m in no rush to move!
- There will be no illicit smoking, pets, or neighbour-baiting parties here.
Perfect! I should really send myself a bottle of bubbly this Christmas.
Dream tenant or demanding drain?
Of course you’re not the perfect tenant in every way, not even for you.
You know exactly what buttons to press to get your landlord – you – to accelerate that refurbishment, or to buy a new sofa. Which could be costly.
(Slightly) more seriously, you don’t scale.
You can only be your own tenant in one place at a time. Perhaps two if you buy yourself a commercial property within your SIPP and work from it.
Beyond that, you’ll have to risk a third-party if you want to own more properties.
Alternatively, you could buy yourself a bigger home, get a bigger mortgage, and seek exposure to residential property via listed housebuilders, or the few trading companies that own it such as Mountview Estates or Grainger.
But many people are already over-exposed to residential property. Buying more global equities is probably a better bet.
Method in the mortgage
The main benefit of having me as a tenant is risk reduction.
I am much more comfortable running a sizeable debt this way, compared to if I was relying on a stranger to cover my mortgage via a buy-to-let rental.
Also note that I don’t increase my exposure to the property market by not paying down the mortgage.
My exposure to residential property is the value of the asset that is my home. The size of the mortgage I finance that ownership with is irrelevant.
Still, having a mortgage does ‘gear up’ my overall investable wealth.
I could use mortgage debt to increase my exposure to property (by getting a bigger home or an investment property).
Instead, I’ve effectively deployed it to own a larger basket of shares, high-yielding bonds, REITs, Bitcoin, cash, and various other types of assets.
I am much more comfortable running a big debt this way, compared to if I was relying on a stranger to cover my mortgage via a buy-to-let.
A strategic bet
It can be helpful to look at common financial constructs through a new lens.
For example how a mortgage is money rented from a bank.
Or how a landlord is someone who borrows money on your behalf.
Similarly, don’t overlook your qualities as a home-owning tenant.
Of course I don’t expect the mortgage haters to call up Halifax tomorrow about a five-year fix, just because they read this article.
For one thing, there’s nothing wrong with paying off your mortgage. It has loads of benefits – emotional and psychological as well as financial – and not everyone wants or needs to boost their returns.
But equally there’s nothing intrinsically wrong with having a mortgage, either, especially at today’s low rates. It’s all a matter of knowing what you can afford and can comfortably handle.
With a dream tenant in place to meet the interest payments, a mortgage might be the safest way to enhance your investing returns.
It sure beats YOLO-ing on meme stonks!