I have £135,000 to invest — is a Whickham rental property still worth the risk?

"We have recently inherited £135,000. We have contemplated purchasing a Whickham buy-to-let property to support our early retirement. Considering that the Skipton Building Society offers a 4.25% return on their 18-month bond and the stagnant Whickham property market, we are uncertain whether investing in a rental property is worth the trouble. Kind regards. Mr & Mrs A from Whickham”.

Dear Mr & Mrs A from Whickham, if your primary objective is to generate income and reduce your workload, buying a buy-to-let property is likely not the favourable option unless you leverage the purchase. Let me explain …

The Skipton Building Society, 4.25% Bond, would provide you with an income of £6,075 annually.

Excluding the initial set up costs of solicitors and Stamp Duty, for £135,000, you can buy a 2-bed terraced house, which would rent for around £750 per month (or £9,000 per annum) meaning a return of 6.67%!

Yet, when you rent a property, you need to allow for management fees and maintenance, so the return would reduce to £7,650 per annum or yield an equivalent rate of return of 5.67% … it hardly seems worth all the hassle for an extra £131.25 per month with the buy-to-let property (compared to the bond).

However, by using a 75% interest-only mortgage on a 2-year fixed deal at 3.94% (with Mortgage Works) on the same Whickham home, i.e. leveraging (even at today's higher interest rates), the return on the 25% cash invested (£33,750) increases to 10.85%.

If you bought three properties, you would use three-quarters of your inheritance to buy the three properties with 75% mortgages. The monetary return after the mortgage payments would be £10,982 per annum, leaving you £33,750 to more than cover the stamp duty and legal costs.

If you had the cash to cover the stamp duty and legal costs, your return would rise to £14,643 annually if you bought four homes.

Is this return sufficiently higher than your 4.25% threshold to make it worthwhile? 

However, most Whickham landlords are primarily motivated by the potential for long-term capital growth rather than rental income. You mentioned the current Whickham market is stagnant, yet as I stated several times in my Whickham property blog, Whickham house prices have upturned recently, and rents are risen like a rocket in the last couple of years.

Of course, there is a risk of Whickham house prices declining significantly since interest rates are rising and we have world events that could change things. However, historically, Whickham property prices have generally outpaced inflation on average by 2.4% per annum since 1975, something a savings bond can never do.

That means that 2.4% needs to be added to the yield for the rent to give you the true return on your rental investment. 

Therefore, with an asset that retains its value in real terms, a rental income stream that does the same, and a depreciating debt, the long-term potential of the Whickham buy-to-let properties appears more enticing. 

(However, it is essential to note that property values can experience sudden and significant short-term declines – but if you aren’t selling, that doesn’t matter).

If your aim is to contribute to early retirement, you will need to invest your £135,000. 

Cash is suitable as a short-term option, but it won’t preserve your purchasing power as time passes.

To generate a real return, you must invest that cash, whether in property, a carefully selected portfolio of stocks, crypto, gold or another investment avenue. There is no definitive answer and seeking advice may be beneficial, but ultimately, the best investment aligns with your comfort level.

The simple fact is that the country is not building enough homes for the people who live here, the people who are living longer and the 600,000+ net immigration we are experiencing. If you are playing the long game, with great advice from an agent and doing your homework - it could be for you.

If you would like any thoughts on this, do not hesitate to reach out and have a chat.

Kind regards

Whickham Agent

P.S. As with all investments, all income will attract taxation. It would be best to chat with an accountant about that.