View all articles
Over five years ago, I took my first tentative steps toward becoming a landlord. Like many, I was captivated by the prospect of a secure, passive income and a healthy retirement fund that would support me in my future years. What is more, how hard could it really be? There are countless books, videos, and influencers espousing how easy property investment can be and how many hundreds of thousands – or even millions – of pounds you can make.
Unfortunately, the reality of property investment and being a landlord doesn’t quite hold up to the glamorous narrative that some would have you believe. Let’s not be mistaken, being a landlord can be a fruitful and rewarding pursuit. There is the potential to earn relatively good returns and to challenge yourself as you continue to grow and learn. However, as with any new venture, starting out as a landlord can be a tough reality check, fraught with common mistakes and painful experiences.
Similar to most landlords, I have experienced my fair share of rookie mistakes and rude awakenings. Looking back with the benefit of hindsight, there are many things that I wish I had known when first starting out, some of which seem glaringly obvious.
The Myth Of Passive Landlord Millionaires
Like many wide-eyed new landlords, I entered the world of property investment naïve to its true realities. Dosed up on a heavy stream of YouTube videos and books highlighting rags to riches stories, I believed that becoming a landlord was an easy route to a passive income with minimal effort. I could continue to work in a high-pressure job whilst my money simultaneously worked for me, generating above average returns.
Unfortunately, the reality of being a landlord doesn’t quite live up to the eye catching headlines that you see online. Although property remains a fantastic asset class to invest your time and money into, there are no easy wins. As landlords and investors, we cannot expect to put our money into run-of-the-mill terrace properties and rent them out for an above market return – at least not anymore. This is where the myth of property being the route to becoming a passive millionaire falls short. Unless you have millions of pounds to spare with which to invest in property, becoming a landlord is not going to lead to a six-digit passive income each year.
Landlords are posed with a problem. It is certainly possible to generate a passive income and it is certainly possible to generate healthy returns as a landlord. However, it is nigh on impossible to generate healthy returns passively, without a huge lump of starting capital. Investing in property and managing a portfolio of houses requires time, effort, and commitment. You need to be able to invest the time and effort required to find the right properties in the first place. When you do find the right properties, they will likely need work doing on them to realize their true potential. Even when they are let out, managing tenants/agents and ensuring you are compliant and profitable is a task in itself. Although there are products and services out there that can save you time and hassle, they will always come with an expense, reducing your profitability in the long run.
With the benefit of hindsight, I wish that I had understood and accepted that becoming a successful landlord is a long and arduous road. There are no easy wins. In doing so, I could have saved my time and funds instead of seeking out ‘investment properties online’. I could have better spent my time looking for opportunities to add value and focusing on clearer strategies to generate better returns. Instead, I wasted time and money pursuing easy wins and passive returns. As with all things, nothing in life is free.
The Need to Add Value to Your Property Investment
Once you acknowledge that you cannot generate great returns passively, the question then becomes ‘how do you generate great returns?’. Usually, the answer is by adding value to the deals that you do. When I started out as a landlord, I fell into a pattern of looking for nice, ready-made investment properties. I looked for properties that were ready for tenants to move in and which I could see myself living in. The houses were ready to go and required little effort on my part to make them lettable. Whilst these properties have generated reasonable returns, you will be unsurprised to learn that none have made fantastic investments. Starting out, I missed a crucial part of property investment; the opportunity to add value.
Although many landlords have left the market since I started out, the private rental sector remains a competitive marketplace. If you could generate fantastic returns by simply purchasing two-bedroom terraced houses in great condition, everyone would do it. In reality, if you really want to make returns that will help to make you into a property mogul, you need to find the opportunities that others miss. There are great returns out there for landlords that can spot properties with the potential to add value. Landlords can add value in many ways, such as:
- Finding derelict properties which need to be brought back to life.
- Extending or reconfiguring older houses to add additional bedrooms.
- Converting large houses in central locations into HMOs.
- Using tasteful interior design to create premium furnished or serviced apartments.
- Renting out properties in prime locations on short-term lets, by using platforms such as Airbnb.
- Converting commercial property into residential units.
- Researching areas with growth potential or infrastructure investment.
In hindsight, I wish now that I had spent more time focusing on properties where I could add value. Although necessitating more work, I sold myself short and locked in average returns in the pursuit of simple deals. It was too easy to stick in the safe zone of buying properties that were ready to go. Instead, I could have invested more time and effort into adding value, which could have turbocharged my returns in the long run and generated a more lucrative portfolio.
Analysis Paralysis – Getting Bogged Down in Property Information
As time went on and I became more aware of the need to add value to the properties that I bought, I encountered another common hurdle of property investment and investment in general; analysis paralysis. Despite the intoxicating allure of ‘zero-money-down’ property investment and the use of high net worth networks, for the majority of landlords, property investment usually entails tying up a significant proportion of their net assets in a single or limited number of assets. As such, property investment can be a high stakes game. If a deal goes south, you can lose a sizable part of your net worth and financially knock yourself back years. Therefore, it is only common sense to want to avoid bad deals.
The problem with wanting to avoid bad deals is that the thought process can often translate itself into a need for perfection – the perfect deal. In wanting to avoid a bad deal, it is easy to set the bar too high and rule out good opportunities because they fail on a certain metric. Unfortunately, this is where your analysis can become paralysis, preventing you from investing in the right deals and making the right decisions.
Although it is easily said with hindsight, I have lost count of the number of properties and opportunities I have passed on as I didn’t feel certain that they were the right deal. What is even more galling, looking back, is that I knew at that time that they were profitable opportunities. However, I fell into the trap of dragging my feet or passing on the opportunity as I felt that, although they would be profitable, I could find an ever more profitable opportunity elsewhere. The result was that I sat with money in the bank, waiting for perfect opportunities that rarely, if ever, come along.
Frustratingly, the pursuit of perfection is a hard thing to shake. I still find myself listening to the voice in my head that devalues opportunities when I compare them against my hypothetical perfect deal. It requires a mental discipline to overcome analysis paralysis. An acceptance that it is better to routinely invest in numerous good properties and deals than to waste time searching for the perfect deal, which may never come about. In hindsight, I would be far better off today if I had understood this from the outset.
A Lack Of Clear Strategy for Your Property Portfolio
Starting out, I confused goals and aspirations with a clear and quantifiable strategy. I knew that I wanted to pursue financial security and I believed that becoming a landlord was one of the best ways of doing so. I thought, how hard could it be? Purchase a house, rent it out and reinvest the proceeds. Strategies are action plans to achieve your goals and although I had a goal, I lacked the detailed plan and framework to successfully achieve it.
It is easy to dismiss the benefit of proper investment planning, but in doing so you run foul of the age old adage. That is; failing to plan is planning to fail. In part, it was my lack of a clear strategy that contributed to my inability to see the need to add value, and without a plan to measure my performance against, I was unable to see the cost of overanalyzing and passing up on good opportunities.
Whether it is life or property investment, a clear strategy is paramount to success. You need to be able to outline your goals and the realistic time frames by that you want to achieve them. From there, you need to develop the structure of how you intend to achieve those goals, breaking each strategy down into parts.
For example, your clear quantifiable goal could be the desire to earn £30,000 per annum from a property portfolio by 2030. You have eight years to build out a portfolio that will generate the returns that you need. Hypothetically, if you invest well and leverage your position you may be able to earn 10% on your capital in high-yielding properties. So in reality, if you want £30,000 in income you will need more than £300,000 in capital by 2030. Working backward and assuming you have £50,000 today, you would need to contribute a further £1,000 per month and generate a return on investment (ROI) of 14 percent to get to £300,000 in eight years.
Once you know your quantifiable requirements, you can start to develop a detailed strategy of how to achieve them. Almost immediately, you would know that you would need to add value to generate consistent returns of more than 14%, whilst also earning enough to continue saving. You will need to seek out development opportunities with shorter timelines or higher yielding HMO opportunities which can bolster your returns. This helps to create a framework and an opportunity for specialization. Once you know what you need to achieve, you can focus on the elements of property investment that will help you to get to your desired goal. In doing so, you can increase your likelihood of success.
Whilst the above example is hypothetical, in hindsight I wish that I had set out my own clear strategy when starting out. Having a strategy like the one above would have helped me to realize the need to add value at an earlier stage. At the same time, it could have helped to benchmark the opportunities that I found against my aspirations, helping me to avoid the pitfalls of analysis paralysis. In short, a clear strategy could have helped to prevent or realize some of my other mistakes sooner.
Not Seeing Property Investment as a Business
A significant proportion of the UK’s landlords manage properties alongside a primary career. Their investments in property fall in addition to a day job which provides their main source of income. I myself fall into this category, viewing my properties as a source of future financial security rather than an income for today. What is strange about this is that I previously found myself failing to consistently apply the same professional standards that I enact in my career to my role as a landlord.
To be a landlord is to run your own business, both figuratively but more often literally as well, as more and more landlords hold their properties within a limited company structure. However, when letting properties alongside a day job, it is easy not to apply the same standards of professionalism to your portfolio as you do to your salaried work. I found myself slipping into this mindset to start with. I didn’t focus enough on the bottom line, sometimes making decisions based more on emotional factors than business considerations.
Unfortunately, being a landlord requires a degree of ruthlessness. You need a keen focus on your profitability and strategy, whilst being willing to have difficult conversations and make difficult decisions. Whether it is dealing with problem tenants, rogue tradesmen, or dishonest letting agents, you need to approach being a landlord as if it were your sole livelihood and day job. Unfortunately, this means challenging people who provide you with poor service, being ruthless in your negotiation, and making every penny count.
With the benefit of hindsight. I have probably lost thousands of pounds due to decisions I made based on emotion rather than practicality. Whether it is giving problem tenants the benefit of the doubt because I like them, or not wanting to short change people when negotiating. Whilst my decisions bought me the ability to feel good in the short term, they often cost me significantly in the long term. Sometimes being a landlord is about consistently generating an income in a fair and reasonable way. Although they are not words that feel comfortable to write, it is a lesson that I wish I had learned earlier.
Choosing the Right Property Management Solution for You
As mentioned previously, a significant number of landlords let out their properties alongside working a day job. As such, nearly half of landlords use a letting agent in one capacity or another to manage their properties. I have used letting agents to ‘fully’ manage my properties since starting out. It made sense to rely on a professional given my initial inexperience, time-consuming job, and geographic distance from the properties. However, using a letting agent has been far from plain sailing.
The quality of letting agents can vary accordingly and cheaper fees tend to come at a cost elsewhere. For example, many agents charge mark-ups on the fees that tradesmen will charge for repairs. Equally, many of the agencies that tend to charge a lower percentage of rent will have significant cyclical costs, such as charges for renewing tenancies or conducting property inspections. As a rough rule, you can expect that the true cost of using an agent (including the supposedly cheaper ones) can be between 10-15 percent.
In hindsight, it is naïve to think that you can ever truly be hands off as a landlord. Agents can be relied on to act as a conduit, but property investing is never entirely passive. To protect your returns and ensure compliance you need to manage your letting agent properly. You need to be able to trust that they are making decisions with your interest in mind and not just relying on tradespeople that offer them the greatest kickbacks. Equally, for the money that you pay them, they should be serving and advising you. They should be able to spot potential issues arising in a tenancy and advise you of problem neighbours and other factors that may impact your profitability. If not, poor agents will lead to higher maintenance costs, greater tenant churn, and a lack of visibility of your properties.
When starting out, it is worth really considering whether using a letting agent is the right decision for you. With the advent of software like Landlord Vision, it is easier than ever to manage your properties and tenancies remotely, alongside your day job. So long as your remain on top of your compliance, choosing to self-manage your properties is one of the easiest ways to increase your returns and enhance the profitability of your portfolio.
