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Huge Buy-to-Let Success: Where Does It End?

Buying buy-to-let properties is a very different investment to lending to buy-to-let investors. But both are great investment opportunities in very different ways.

Landbay is a P2P lending websites that offers loans to landlords with tenanted residential properties. 4thWay® rates it as one of the safest P2P lending opportunities. (See Safest Peer-to-Peer vs Savings Accounts.)

Landbay recently sponsored a report from The Wrigglesworth Consultancy on returns in buy-to-let.

Turning £1,000 into £5,000

The report shows that buy-to-let landlords have turned £1,000 into £5,000 over the past 18 years if they bought their properties with cash and no mortgage.

That's an annual return of over 9%. These gains way outstrip just about every other type of investment over the period, including other non-BTL property investments and the stock market.

If the buy-to-let landlords borrowed to buy using mortgages, the average landlord has turned £1,000 into more than £20,000. That's a staggering 18% annual return.

The Wrigglesworth Consultancy writes that those figures are based on the assumption that the landlords were “conservative” in their reinvestment approach, i.e. they didn't re-mortgage and borrow even more when house prices rose, so that they could buy even more properties.

If they had done that, The Wrigglesworth report states the average BTL landlord would have turned £1,000 into more than £34,000! A 21% annual return.

Small pinch of salt for you

We have to remember the heritage of this report. Sponsored by Landbay, which has a vested interest, it means we have to take the exact figures with a pinch of salt.

For example, it starts its calculations from 18 years ago,which means 1996. That's probably flattering, since it was right at the start of the last, long property boom.

(Although The Wrigglesworth Consultancy says it chose 1996 because “this was the year the buy-to-let mortgage initiative was launched…opening residential rental property to ordinary investors.”)

But the phenomenal success of buy-to-let over the past two decades is no secret, so if we were to do the maths ourselves we'd probably still be very impressed.

UK landlords to own the entire world

Most of the gains were due to rising house prices as opposed to rent. However, massively rising house prices can't last.

And a compound growth rate of 18% forever would mean that British landlords own the entire world before the end of this century. Ask a physicist: they'll say that perpetual growth is impossible, so 18% returns forever are unsustainable.

A few years ago I looked at a variety of data from the UK and other countries I've found that over the very long run, house prices basically follow inflation. We can expect the same of rent too.

Great returns still available

That said, solid returns over and above inflation are still very achievable.

The Wrigglesworth report shows that, even if house prices and rents rise a relatively modest 4% and 2% per year respectively, buy-to-let landlords using mortgages to fund their businesses can probably expect returns in the high single digits or above in the next decade, even if mortgage rates rise quite a few percentage points.

That would turn £1,000 into up to £3,000 over the period.

Landbay is a very different investment

The Wrigglesworth report is focused on average gains. But some amateur landlords – who were rather less than average – have lost a lot of money and gone bankrupt over the past two decades.

Buy-to-let is not easy. It is a business for which you need knowledge and several different skills. That's why Landbay focuses on experienced landlords with a great track record and excellent properties.

And a good, 18-year long run has created many experienced landlords in sound financial positions.

Landbay involves lending to a large number of experienced landlords, spreading your risks across proven businesspeople. This makes it far safer than becoming a buy-to-let landlord yourself.

As a result of it being lower risk, it is also lower return. Landbay pays 4.4% for a three-year fixed deal and 3.56% for easy access.

So Landbay itself is a very different proposition to buy-to-let investing.  It pays considerably better than most comparable savings accounts, with, in my view, little risk. But not the exciting double-digit returns of being a landlord yourself.

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