People have been deeply fixated on real estate for decades, and they frequently see buy-to-let investments as a one way bet to become wealthy. But it might not be as simple as it looks to manage such properties in practice, with all of the associated financial and emotional strains. Although many people have made money with buy-to-let, timing and good fortune are mostly responsible for this success. In the meantime, the media has frequently reinforced the idea that pensions are insignificant, undermining their significance in retirement planning.

Due to their tangible presence and the familiarity of managing mortgage debt, buy-to-let investments might appear alluring and are sometimes seen as less hazardous. There have been many success stories, but they hardly ever discuss the stress and setbacks that come with them. Attractive rental yields, influenced by rising populations and tight housing supply, may not always reflect the full investment risk. Interest rate risk is often overlooked.

On the other hand, while pensions across the globe may offer notable tax benefits and a stable investment safe haven, they have faced criticism—partly due to past mis-selling scandals. Contrary to common perception, sensible investing involves diversifying across global markets, which have historically delivered strong returns above inflation. As we’ll explore below, the same cannot be said for the broader residential real estate market.

With deposit rates staying low and inflation reducing the value of savings by over 20% in the past 20 years[1], some investors have started viewing buy-to-let as an alternative to holding cash. Many have also turned to riskier investments like high-yield bonds, stocks, or property in search of higher yields. However, moving from cash to buy-to-let is a major shift, especially when borrowing is involved, and it brings a much higher level of risk. In reality, investing in buy-to-let means starting a highly leveraged business, complete with all the costs, responsibilities, and taxes that come with it. Without careful financial planning and realistic expectations, investors may face serious financial difficulties.

Most investors would hesitate to borrow three times the value of their portfolio to invest in stocks or bonds, yet this level of borrowing is common in the buy-to-let market. Property investing makes it relatively easy to use leverage, as most buy-to-let mortgages only require a 25% deposit in the UK. Using the UK property investment as an example, purchasing a £200,000 property might involve putting down £50,000 and borrowing the remaining £150,000. This kind of leverage can significantly magnify outcomes: if the property value rises by 20%, the investor sees an 80% return on their initial capital. However, the same is true for losses—a 20% drop in property value would lead to an 80% loss on the initial capital. Using borrowed money in this way carries serious risks, including the chance of falling into negative equity. In past housing market crashes, such as those in 1989 and 2007, UK residential property prices dropped by about 30% after adjusting for inflation.

For many first-time buy-to-let investors into the UK property market, the appeal often lies in the promise of strong returns, with gross yields currently averaging around 6%. With rental income typically near £1,300 per month, this points to an estimated property value of about £260,000[2]. These figures can seem encouraging at first glance, but they don’t reflect the full financial picture. The costs tied to a buy-to-let investment are more complex and can be broken down into three main phases: the initial purchase, the day-to-day running of the property, and the eventual sale cost.

Upfront costs often catch new investors off guard. These may include stamp duty, legal and professional fees, necessary repairs, and safety certifications—all of which add up quickly. Once the property is up and running, landlords must also cover recurring annual expenses. These range from insurance and general maintenance to costs associated with empty rental periods. Larger, less frequent expenses—such as replacing a boiler or roof—should also be expected. A good rule of thumb is to set aside around 30% to 35% of gross rental income for these ongoing costs[3], not including mortgage repayments. Any net rental income is subject to income tax depending on the jurisdiction. When the time comes to sell, further expenses arise. These may include estate agent fees and UK capital gains tax, unless the property has been used as a primary residence for a qualifying period.

The actual net yield of buy-to-let assets, after the figures are computed, is much less appealing than headlines indicate. Due to the high cost of real estate, continuing expenses, and borrowing, landlords find it difficult to generate profitable net yields. Net yields might drop rapidly to the 2% and lower level when using the 30% to 35% criterion mentioned above and current mortgage rates, especially if it is assumed that the property might not be occupied 100% of the time if tenants decide to vacate and cannot be replaced quickly.

Lower yields make property price increases even more vital for buy-to-let property owners. A wise investor combines yield and capital gain to assess an asset class based on overall return. We may assess how well an ungeared buy-to-let investment performs in comparison to conventional investment portfolios by assuming a substantial 2% net post-tax yield and adding it on an ungeared buy-to-let investment. We can then add it to the UK house price index and compare its performance to traditional investment portfolios. 1% annual costs are deducted from traditional portfolios, to be equal. This scenario doesn’t include any initial set up costs associated with the buy-to-let approach, altogether they can be significant.

Figure 1: Buy-to-let versus traditional portfolios – simulated strategies after inflation 1981-2024

Data source: See endnote[4].

One essential retirement pillar are pension funds. Investing in buy-to-let real estate is similar to running a small business with a declining asset that needs ongoing management to generate profits that fall somewhere between bonds and stocks. Borrowing is a big change from the deposit-like option that is frequently depicted in the media because it increases both risks and rewards. Buying to rent is not a simple or risk-free way to get rich; it requires careful management and entails high expenses. On the other hand, building a globally diversified, well-structured portfolio is a sensible strategy for your retirement planning that frees up time for more fulfilling pursuits than property management.

[1]     Bank of England © SONIA and UK CPI. Data to Apr-25.

[2]     ONS © Private rent and house prices, UK: April 2025.

[3]     Before it was merged with other financial bodies in 2017, the Council of Mortgage Lenders (CML) advised holding back 30-35% of rental income to service ongoing costs.

[4]     Global equities Albion World Stock Market Index (AWSMI). Balanced (60/40) = 60% ‘Global equities’, 40% Albion 2.5Y UK Constant Maturity Bond Index.  Costs of 1% have been deducted from the ‘traditional’ portfolios and portfolios were rebalanced back to the original mix once a year. UK house prices = Nationwide House Price Index.