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Planning to retire on buy-to-let? You could be making a big mistake

Over the past few years, thousands of investors have acquired buy-to-let property in the hope that it will provide them with a comfortable income in retirement.

However, I believe that investors using the funds to invest in buy-to-let could be making a big mistake. Today I’m going to explain why.

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Complex business

At first, acquiring a buy to let property might seem like a straightforward and practical way of guaranteeing a future income stream. As well as rental income, there is also the potential for capital gains if property prices increase substantially.

But there are some significant drawbacks to buy-to-let investing. For example, you need to find the right tenant to occupy your property. If you don’t, you could face big bills if the tenant fails to pay their rent on time and you are forced to take legal action.

Buy-to-let owners and landlords also have certain obligations when it comes to maintaining the properties they rent out. Under a new law that is due to come into force in March, tenants can sue landlords for cold or damp homes. This could become a big headache for landlords, especially those that own older properties. 

As well as introducing new regulations, in recent years the government has been clamping down on the tax loopholes available to landlords.

Landlords are no longer allowed to deduct mortgage interest costs from property income entirely. There is also a long list of other expenses and charges landlords have to deal with, including letting agents fees, wear and tear costs, electrical safety checks, the gas safety certificate, energy performance certificates, insurance costs and landlord licenses, which councils across the UK have started to introduce and are no longer limited to just Houses of Multiple Occupation (HMOs).

Then there are the legal fees and costs associated with the buying and selling of property including stamp duty land tax. And if you need to evict a tenant, the costs of doing so can quickly spiral out of control. Eviction court fees can cost landlords thousands of pounds.

Poor value for money 

Add all these fees together and the economics of buy-to-let investing quickly begin to look poor. 

To give just one example, letting agents typically charge around 10% of rent as a management fee. If an investment fund tried to charge that much as an annual management fee, it would not last long.

This is just one of the reasons why I think buy-to-let is a poor investment strategy. As well as high costs, you would need to own 100 properties to get the same kind of diversification in your portfolio as an investment in the FTSE 100, even then, you wouldn’t have the global diversification the FTSE 100 offers. 

At the same time, shares do not have ‘void’ periods, where no paying tenant is occupying the property. What’s more, it is highly unlikely you’ll get a call from the management of a blue-chip company, asking you to come and fix the boiler on a Sunday night.

So, that’s why I believe you could be making a big mistake buy planning to retire on buy-to-let. The asset class might look attractive, but the costs and time spend managing a property can quickly eat into returns leaving you with less income in retirement than expected. 

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.