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I'm fairly new to investing and I've never learnt to invest in different asset classes. Since my career has kicked off really well in the recent 3-4 years, now I'm planning to invest in property.

I've been investing in index funds for the last a bit over an year and it's going really well but I have only around 10% of my net value invested there.

I want to invest in property and would like to know your opinion on buying a property with a buy-to-let mortgage vs buying with cash.

I've read 2 Rob Dix books on property investments: Property Investment for Beginners and The Complete Guide to Property Investment

The common theme is to get a 25% buy-to-let mortgage to leverage your investment which makes sense. The other one is to buy cash - I watch a lot of Dave Ramsey (more popular in the states I guess) and he advises to never take a mortgage.

What's your take on that? Is it worth taking more risk by leveraging?

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    Dave is good for a select group of people. If I followed his advice, I’d had retired earlier and gone bankrupt already. His “My way or the highway” approach is offputting to anyone who chooses to think, to run the numbers. I respect those who are more/less conservative than I, but not those who are so arrogant. He is a celebrity, but not an advisor.
    – JTP - Apologise to Monica ♦
    Jul 27, 2019 at 23:17
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    Being a landlord is definitely not passive, even if you use a property management service (which eats a chunk of your profits), with all the risks and headaches which pro-real estate books minimize or don't mention. Do you want that?
    – RonJohn
    Jul 28, 2019 at 4:05
  • @RonJohn Well, I want my money to work harder because 10% of my net value invested is laughable. And since all my not invested money sit on my company's bank account, this is the only thing I can think of. (apart from a Self Investment Pension Plan but I don't like the idea of the government telling me when can I take it out). Of course it involves risks and headaches but what are the other options?
    – matewilk
    Jul 28, 2019 at 11:34
  • @JoeTaxpayer yes I get your point, the target group of Dave is a group that is eyeball deep in depth so it's not for someone who is savvy with money already. Although I find some of his advices useful for example buying a car which is worth not more than 1/4 (if I remember correctly) of your income.
    – matewilk
    Jul 28, 2019 at 11:55
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    @matewilk "I want my money to work harder because 10% of my net value invested is laughable" Have you rejected putting more of that un-invested 90% into index funds (probably different ones that the one(s) you're currently in)? If you have, adding why to the question may help.
    – TripeHound
    Sep 16, 2019 at 7:34

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To make it simple I'll consider a 50% mortgage, and assume you have enough to buy one house outright.

  • Monthly costs. If you own one house outright, your costs are maintenance, and any fees you're paying your estate agent. If you own two properties with mortgages, you now have much higher monthly costs.
  • Rental income. By buying two houses you now have double the income
  • Void periods. Whenever a tenant leaves you'll probably have a gap before you get a new tenant in, and you're missing the rent over that time. With two properties you'll probably not have both properties empty at the same time, so you'll always have some money coming in. And you need money coming in to cover the mortgage. If you only bought one property (with no mortgage) then that's all your rental income gone for that void period, but then again you have no mortgage to pay so does it matter?
  • Capital growth. If you're planning on selling up in 5 years, you probably don't need to worry about this. But if you're planning on holding the properties for 20 years you could see significant price increases. Twice as many properties means twice as much capital growth.
  • Risk. What happens if the housing market collapses and your properties are now worth much less? If you own one property with no mortgage, the limit of your loss is the amount you spent on the house. If you own two properties with mortgages, and the properties more than half in value, then you owe more on your mortgage than you can sell the house for.
  • Inflation. This is the same principle as owning a house, but if buy a house with a mortgage, then you pay the price at today's value, and your mortgage is fixed in absolute value over it's length (i.e. if you're paying £500 a month now, you'll still be paying £500 a month in 20 years). With inflation of rents, if you're collecting £1000 a month now, you might be collecting £2000 a month in 20 years. So your rental income has gone from twice the mortgage to four times the mortgage, or in other words in the long term the mortgage becomes comparatively small.

Other than the Risk factor, most things point towards owning multiple properties with mortgages being a better bet. Though you do need to run the numbers and check that you're not out of pocket on a monthly basis (i.e. check mortgage costs don't outweigh the increased rental income). (Although you may choose to accept a small monthly loss early on, for greater monthly gains later due to inflation, or for the greater capital gains.)

As regards Dave Ramsey - the US property market is completely different to the UK's. They haven't historically had anything near the house price increases that the UK has experienced. I would therefore personally question the relevance of his advice to a UK investor.

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  • A general warning: while the OP could see significant price increases, it's also possible that price goes in the other direction. For example, between 1778-1779 and 1814-1815 house real prices in Netherlands went down by 80%, in a time period of bit over 35 years. That's the average. Every year, new houses are built and old ones are demolished. If you buy 1 house, after 1 year it's 1 year older than it was. Thus, for a single house as opposed to market average, the fall would have been more than 80%.
    – juhist
    Sep 15, 2019 at 16:21
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    The 18th century housing market during the Anglo-Dutch War doesn't seem like a very relevant example @juhist
    – pjc50
    Jan 13, 2020 at 16:55

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