Many people have found success in property investing as a ‘passive income' stream, but not everyone. It's a significant commitment to borrow money from a mortgage lender and one you may be tied to for a long time. So it’s something you’ll really want to think hard about before committing to.
Property investment has been the number one source of wealth accumulation since the beginning of time and the term ‘safe as houses’ is commonly used. For many, this leads you to believe that property is a safe bet and into a false sense of security.
Thus you only think about the positives.
I don’t feel I need to tell you any of the positives regarding investing in property. You know them already; regular income and appreciation of value over time with leveraged return on investment (via mortgage) for little-to-no work.
Sounds like a dream, right?
I don’t want to burst your bubble, but I’d like to share a few ‘less positive’ things to consider about property investment so you don’t get burned. Yes; I got burned!
1. Property values can go down
Just ask anyone who bought in 2007/2008. You’ll find there are thousands, if not millions of people who ended up in significant negative equity for a decade or more. I’m one of them. Fortunately, I wasn’t financially destroyed like many others. When property values go down, you’ve essentially leveraged your return on investment in the wrong direction. You’re in big debt 🙁 And the debt, ties and responsibility can leave you trapped for many years.
2. Interest rates change
Depending on the size of your mortgage, even a 0.5% increase can have a significant impact on your monthly cash flow. The interest rates in 2021 are low — they really can't go much lower, so make sure you do your future projections factoring potential increases by looking at historical rates, and give yourself a healthy buffer. There are various mortgage calculators available, here's one!
3. Be wary of hidden charges
There’s been a big clamp down in recent years, however freeholders and leasehold management agencies still seem to have significant power, at least here in the UK they do. Do you know how much you’ll be paying per year? Can that increase? If so, by how much?
4. Prepare to invest time or more money
That goes for buying, renting or selling. Agents can help you buy, rent or sell your property however they charge a healthy fee that can easily eat into your profit. For example, full management in the UK is around 10% +VAT – that’s 12% off whatever the rent is!
5. Don’t buy with others if possible
If things go wrong, as they did in 2007/8, you could be tied to that person for a very long time!
6. Get agreements in writing
If you do buy with others, no matter what the relationship, make sure you have a document detailing who owns what, who is responsible for what and how decisions are to be made. It is especially important to cover the ‘worst case scenario’.
7. Keep organised
Have your documents in order from day one. You’ll have bank statements to prepare for your mortgage anyway so this is a good place to start. Have a folder for your deeds and documents. Keep a file for all correspondence related to the property, including tenants.
8. Selling can be a pain in the ass
They’ll ask for more documents than you ever knew existed. And if you’re selling with tenants, they’ll want details on that too. See #7!
9. Selling can be a painfully slow process
Even after you’ve agreed, it can take several months for a sale to go through. Some sales fall through and some take several months before an offer is even received. Property is one of the least liquid assets.
10. Tenants and maintenance can be a headache
If you can’t afford to pay a full management fee, you’ll need to look after this yourself. And even if you do, there’ll still be repairs and replacements to deal with such as appliances failing. Then you’ll have regulatory requirements such as electric and gas certificates. Property investment and rental isn’t 100% passive.
11. That monthly ‘passive’ income can be MUCH LESS than you initially thought
All those things mentioned in #10 come at a cost. And usually, after a number if years there will be larger costs such as boiler replacement that eat up any slush fund you’ve managed to grow.
12. It can be extremely stressful (& expensive) when things go wrong
With so much money tied up and peoples lives involved, buying, renting and selling property can be stressful. And as already mentioned, there’s no quick escape.
Property can be an amazing source of (almost) passive income AND support your future – you can even invest in property as part of your pension in some countries – ask your accountant!.
It's just not always roses.
How about as a passive income stream for van life?
If you’ve already established property as an income stream and it’s going well and stress-free, then stick with it.
However, for most people I wouldn’t recommend embarking on it if the purpose is ‘passive income’, especially in the short-mid term. The income can be very little to begin with and most of the time you’ll need a 25% deposit plus 5-10% for other fees just to get started. In most cases, if you’re starting out you’ll be doing well to clear $100/mth ‘profit’ on a small flat/house. And you’ll need to hold that back for contingency.
As an example, when we chose to hit the road, we decided to rent our home out. There's decent equity in it and it gets good rent, however it does not form any part of our ‘passive income'; anything over and above mortgage repayments and bills goes into the contingency fund for any emergencies and repairs.
I’m not against property investment and despite my unfortunate 2007/8 experience (which is still ongoing!), I'm still very much for it. There is no doubt that as a long term investment and with carefully chosen property, it nearly always pays off. 🏡
I’m just much more wary these days of the actual costs — time, money and stress and the potential long-term implications.
Recently there have been some new initiatives / schemes that sound interesting such as let to buy, however I’ve not fully explored them.
UPDATE: In 2022 a new real world asset (RWA) crypto launched that enables anyone to invest in real estate without the headache – check out this article on Tangible.
I’m dead set on investing in property…
That’s cool. I hope to invest in property again in the future. Just not now 😉
You can make it work.
Be sure to take into consideration all 12 points above and ensure you check and triple-check the figures and that EVERYTHING is taken into account (leasehold management fees, ground rent, mortgage repayments WITH increase in interest rates, rental management fees etc) when you do your yield calculations.