Don't underestimate the risks of buy to let
- Robin Powell
- Feb 17
- 3 min read
Property investment is a popular strategy in many countries. One particular approach, buy to let, has gained widespread appeal because of rising house prices.
But that popularity can mask some of the key dangers. Investors often overlook the risks of concentrating wealth in a single asset class like property.
Professor JENS HAGENDORFF from King’s College London warns that many buy to let investors are underestimating the potential downside, especially compared to stock market investing.
KEY TAKEAWAYS
1. Hidden risks of leverage
Buy-to-let properties are typically bought using mortgages, which amplifies the impact of price movements. If house prices fall, negative equity can create long-term financial stress.
2. Rental income must justify the price
Investors need to assess whether the rental income will reliably cover costs and provide a reasonable return. Without that, the investment may not be worthwhile in the long run.
3. Buy to let concentrates exposure to property
Owning both a primary residence and one or two rental properties creates significant exposure to the housing market. This lack of diversification increases vulnerability to downturns.
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TRANSCRIPT
Robin Powell: In many countries, investing in houses or apartments and then renting them out has become very popular.
This buy-to-let boom has been fuelled in part by strong growth in property prices.
But we shouldn’t let that blind us to the risks involved.
Jens Hagendorff: There's very good reasons to own your own home. Whether or not they make a great investment is a different question. I think a lot of people who invest in homes are often underestimating the risks involved in this, and the true costs that come with it compared to investing in the stock market, for instance.
For most people, house purchases involve a mortgage, meaning they are essentially a leveraged buy. And that means that if the price of that asset were to fall in the UK, US, all these countries would have got a history of property bubbles that burst at some point.
If the property bubble were to burst, you don't own all your bank any less money. You're still liable for the amount that you borrowed. So this negative equity then becomes a real drag on your, you know, your lifestyle going forward.
RP: As with any investment, it’s very important to look at the on-going income you expect it to generate.
Ask yourself, what kind of rent can I realistically expect from a buy-to-let property? And does that income justify the asking price?
JH: If the rental income justifies the investment by two, that can be a, you know, wonderful way of investing money. Also a very helpful way for the economy because you are providing some space to live for people who often are younger, whether students or young professionals who are individuals or maybe at the moment priced out of the market, who otherwise would find it very difficult to be able to afford somewhere to live.
RP: Remember, if you own, or have a mortgage on, the house you currently live in, you are already exposed to the housing market. Too much exposure can be risky.
JH: Even most very large buy to let investors will only own a small number of homes, you know. And that means that you may own your own home. You may own a couple of properties that are bought on a buy to lead basis, but that makes you extremely exposed to faults in the property market.
It means you might lose some of the value of your own home, as well as the value of your buy to let the property market go down. If you were a stock market investor and you'd had approached a professional advisor, and that advisor would have told you to put perhaps 1 million pounds into three stocks, you're very likely to be able to take legal recourse against such an adviser, because that would have really under diversified you massively and left you hugely exposed to risk and the fluctuations of your assets.
But that's certainly the way that a lot of buy to let in a lot of property investors to approach their investments, which is to remain very diversified and therefore very risk exposed.
RP: One more thing. Many buy-to-let investors underestimate what you might call the hassle factor — property maintenance, for example, or dealing with difficult tenants.
Buying a property with a view to renting it out is not a decision to be taken lightly.