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Buy to Let Investing – The Low Risk Way

Buy to let investing divides peoples opinions massively here in the UK. Over the last few years disillusionment with the pension system in this country has caused many (including myself) to incorporate buy to let properties into their retirement planning.

For many years now rising property prices, low interest rates, tax relief on mortgage interest and the prospect of reasonably steady/predictable inflation linked income have led to participate in a buy to let boom.

BTL Mortgages


So obsessed are we with buy to let that the government’s recent pension changes have caused some to worry that greedy pensioners will cash in their pension pots and dive into the buy to let market head first, further pushing up property prices. While for some people (like myself) buy to let is an opportunity to improve their financial futures for others it remains the number one reason why so many youngsters are priced out of todays housing market. Judging by the comments I’ve received on this blog in it’s relatively short life to date, buy to let is a controversial topic.

I’ve already covered in depth the rules you should follow for a successful Buy to Let however they don’t really emphasise the key reasons why I view buy to let as a relatively low risk investment or outline the strategy or approach behind my buy to let investments. Below I’ll set out the approach I follow and try to explain the reasons why I see but to let as a low risk investment.


The problem with property investments is that they are big, potentially very illiquid trades. Each one has a material amount of fixed(ish) costs1 such as insurance, repairs, maintenance, ground rent, letting agent fees etc. In addition (assuming you use debt to partially finance your investment) there is always  a large portion of floating costs in the form of a mortgage interest that is of course susceptible to short-medium term interest rate movements (depending on the length of your current fixed rate period).

While house prices are rising, the liquidity in the housing market is never really a problem. Selling your home and buying a new one in under 4 weeks is not unusual. When I bought my first house (now a buy to let) about 11 years ago, because of the area I wanted to buy in2, the estate agent put me on a waiting list. When a property came onto the market in the area specified they proceeded to call the first 10 people on the list for a viewing. On the day I got the call I was the 4th viewer (from memory) and pretty much had to put my offer in straight after the viewing in order to buy the place. Liquidity back then was incredibly high, just as it was before the 2008 crash.

However, as Ermine points out in great detail, when things go wrong with a property investment, they usually do so in a very big and horrible way. Liquidity in the housing market can disappear almost over night.

Unlike a stock market investment there may be times when quite simply nobody will buy your property from you.  This will usually be at exactly the time that you desperately need to sell it. As house prices fall there is nothing to stop your variable costs (mortgage interest) soaring just as the value of your asset free falls.

Negative equity is a place best avoided at all costs.

Buy to Let Investments


Interest Rates

We all used to be obsessed with interest rates in this country, well at least we did before the crisis forced them to record lows. Interest rates have been so low and unchanged now that it is easy to forget how excited we all used to get whenever a rate change was announced.

For the reasons outlined above I aim to be ultra conservative with my property investments and do the following to ensure any risks are minimised:

1. Always maintain very low LTVs

My portfolios average LTV  is currently 54%.3

If I wanted I could go out tomorrow, leverage up and get the finance to buy another two or three rental properties. It would probably all turn out ok in the long run but I would be significantly be increasing the risk I’m running in my portfolio. The additional risk of a portfolio blow up is simply not worth it to me. I like the money tree to grow organically rather than supercharged from too much leverage.

2. Stress test

Working in risk management, it only seems logical to me to stress test my portfolio. The EBA does a great job of making stress tests sound complicated and beyond the understanding of mere mortals however it’s quite simple really.

I use a simple mortgage calculator to see how affordable my buy to let mortgages would be if interest rates spiked to 15%. In today’s environment this may seem far fetched however they’ve already gone above this level in my lifetime and lightening does indeed strike twice (or more).

By looking at the finance costs in a high interest rate environment I can work out pretty precisely where my break even point is – that is the point where expected rental income less expenses (including mortgage interest) switch from negative to positive (or visa versa).

3. Separate it out

When looking at various scenarios related to my property portfolio I always consider it a separate entity to my day job. In other words if I lost my job tomorrow it should have no impact on my buy to let portfolio.

I never plan to have to use any of my wage income to fund any property repairs, bills or finance charges, even when I stress interest rates as outlined above. All savings against future repairs/taxes etc are saved out of surplus rental income and are completely ring fenced from the rest of my assets. As it the case on my tax return my property investments are treated as a unique entity.

4. Take a long term (income only) view

I invest in property purely for the future income it will provide me. The ethos behind my buy to lets is this: someone else is paying off a mortgage for me, once they’re done I’ll have a significant asset 100% owned that throws off a steady income stream that roughly keeps up with inflation.

Early retirement has always been on my mind (well since my early twenties) and for me, buy to let was (and still is) a way for me to get there.

The prospect of a predictable future income stream is my main driver for being a landlord. If you do your homework when selecting a property to buy, you should never have to worry about having issues finding tenants.  In around 10 years the longest I’ve had a property sat tenant-less is about 1 month (over the Christmas period). In addition broadly speaking the rental income I’ve received has risen with inflation over the years.

After much deliberations about when to pay off the buy to let mortgages I’ve now started to over pay in earnest each month. Each month I reduce the capital outstanding on my loans, that 54% LTV is reduced and my net future income stream increases. Whether the properties have doubled or halved in value is of no relevance to me, I’m in this game for the long term income.


1When I say fixed costs here I mean ones that stay roughly the same and only rise with inflation
2This wasn’t even in London!
3I use cost price + inflation for my LTV calculations, not the current (crazy) market prices.

{ 13 comments… add one }
  • Nathan May 28, 2014, 10:08 am

    Interesting article, thanks for taking the time to explain your approach.
    I’m way too risk averse to feel comfortable with any investment leverage and would feel a little too exposed with so much in one asset class, but that’s just me and that limits my returns.
    FWIW I also rent out a property and over the time that it’s been let (4 years) it has been a reliable and relatively stress free source of income. However, in all honesty thats down to good tenants, which could come back to bite me anytime.

    • Under The Money Tree May 28, 2014, 10:22 am


      I fully agree that good tenants are the key to a hassle free buy to let.

      I try to be very careful when selecting mine and have turned a good few away over the years – again it’s all about minimising your risk. The type of tenants you get is to a large degree dictated to you by the type and location of the property you’re renting. Sure a buy to let in a run down or economically deprived area might yield 10% on paper, however with that may well come an increased risk of poor tenants. Always be sure to get appropriate credit checks done, ask for references and if possible meet them before accepting them as tenants.

  • MrsFinancialFreedom May 28, 2014, 2:41 pm

    I’m thinking of getting a buy to let property but taking on new debt is always a bit of a worry especially when talk is that we could be in a housing bubble and prices could fall in future.

    I think having a low LTV is good as it also means being able to secure lower interest rates on your buy to let mortgage. I still need to do a lot more research on it before diving in. Now if only someone could only come up with a solution to find the perfect tenants every time!

    • Under The Money Tree May 28, 2014, 3:14 pm

      Mrs FF,

      As I tried to explain in this post, if any proposed property investment is dependant on house price gains I would personally steer clear. I focus purely on the income not capita gains/losses.

      As stated to Nathan below choosing ‘good’ tenants is a key part of being a successful landlord. While you can never eliminate the risk completely you should be able to minimise it to a certain extent.

  • the escape artist May 28, 2014, 2:46 pm

    Thanks for the post.
    How do you decide how much capital to allocate to BTL versus equities?

    • Under The Money Tree May 28, 2014, 3:29 pm

      Escape Artist,

      I’ll be honest, I have no set formula to determine how much capital to allocate to buy to let. Instead I look at the problem more from a future income potential perspective and work back from there.

      My current plan is to have property providing roughly 50% of my money tree income, with the majority of the remainder coming from equities. It’s pretty easy to accurately determine how much annual rent a property will provide me once debt free (9 x expected monthly rent is a good ballpark to start in). From there it’s just been a case of running the numbers, stressing interest rates (as described above) and finding a way to scrape together the required deposit!

  • weenie May 31, 2014, 11:11 pm

    Good post – I just did your 4 point risk test and can tick all the boxes for my BTL, although I only really considered points 3 and 4 when I was buying. I also clicked through to your ‘when to pay off the buy to let mortgages’ article but I don’t have your ‘problem’ of being a 40% tax rate payer! I have paid off around 20% of my BTL mortgage already but I think I’ll ease off a bit now as I still need mortgage interest payments to offset my tax.

    • Under The Money Tree June 2, 2014, 9:48 am


      Welcome and I’m glad you liked the post. I’m also pleased to hear that your BTL passed my stringent stress tests! Whether and when to pay off a BTL mortgage is one of those financial questions I find myself returning to. Pay of now and enjoy/invest the income but suffer tax or keep the debt and avoid tax. No matter how many times I run the numbers I often get a change of heart!

  • theFIREstarter April 1, 2015, 1:45 pm

    Great article! One thought I had:

    If interest rates really went up to 15% would rental prices not soar as well? Maybe not up to the level you’d expect but surely there are many BTL landlords out there that are no where near as cautious as you have been, and there would be a necessity for rental prices to rise. You would be sitting pretty at this point as you could undercut everyone and still be making a great profit, but on the other hand you may be leaving extra money on the table right now by being overly cautious? (I am not saying you are doing the wrong thing by any means… just playing devils advocate really)


    • Under The Money Tree April 1, 2015, 2:37 pm

      Maybe, though if rates went to 15% then I’d expect inflation to be up around those levels too. Would rental increases be able to keep pace with double digit inflation…I don’t know the answer to the one.

      I almost certainly have left money on the table by not leveraging up to the max these last few years. In my defence I just didn’t fancy the levels of risk, particularly given that I work for a bank so job security hasn’t been the best over the last 8 or so years.

      • theFIREstarter April 24, 2015, 12:24 pm

        There are a lot of unknowns so being cautious seems sensible, just to be clear I wasn’t knocking your tactics at all and sounds like you know exactly what you are doing.

        Cheers 🙂

  • Mark April 7, 2015, 1:40 am


    Great article. I’m a huge fan of your blog.

    I’m an Expat living in the USA, but I still have a UK BTL property.

    My interest only mortgage is at a standard variable rate of 5.69%!!!
    LTV is 65%, the rental yield is 5% after expenses (service charges etc). I currently make no profit on this property.

    My mortgage provider has offered me a 2 year fixed @ 3%. At that rate, I could switch over to repayment and my balance sheet would pretty much stay as it is now. Seems like a great deal, but any overpayments would be limited to 10% of the loan annually.

    Whereas now I can pay off the current mortgage product entirely without any penalty. Why would I do this when I can switch to a lower rate repayment mortgage? Why would I tie up all that capital? Let me explain.

    Although I pay taxes in the USA, I’m still required to fill in a self-assessment form annually for my UK rental income.
    There are very few tax breaks for UK Expats e.g. I’m no longer eligible to contribute to an ISA/NISA.
    Luckily I’m still eligible for the standard Personal Allowance of 10,600 GBP per year and my annual rental income wouldn’t exceed that amount.

    To take advantage of this, I’m considering paying off my UK BTL mortgage and reinvesting the tax-free rental income into my Dividend Growth portfolio. The US Dollar is strong at the moment so I think now is a good time to strike. At this stage in my life (I’m 39) I don’t need the income and 5% tax-free to reinvest looks very appealing.


    Thanks in advance.


    • Under The Money Tree April 7, 2015, 9:07 am


      Ouch, sounds like your SVR on your mortgage is way too high considering where rates are. While I can’t offer you specific advice, taking advantage of any tax breaks on offer is always a sensible thing to do. In addition, as stated in the article above I’ll always opt to go capital repayment over interest only where possible – it’s rarely a bad thing to de-leverage a position.

      Are you still allowed to contribute to a UK pension? If so diverting the tax free income there might be a better bet than a taxable share account. I’m not sure on the rules around this for expats however.

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