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Our retirement income: property rental

Funding early retirement with rental properties

I've been doing some sums in readiness for our tax returns. Our finances are quite simple so it doesn't take long, although a complication is having to submit a tax return in the UK where our rental properties are, and another in France where we're resident.

In the UK, Sally and I have to submit separate tax returns, whereas in France we submit a joint return. It's interesting how different countries have different systems. Another difference is the tax year, in France it matches the calendar year which makes sense to me, while in the UK it runs from 6 April until the following 5 April. That weird date comes from a mishmash of an ancient new year date of 25 March, a switch from the Julian calendar to the Gregorian calendar, plus the effect of a leap year - I'm hoping that comes up as a Trivial Pursuit question one day!

Thankfully our taxes are relatively straightforward. We have:

  1. Rental income from our UK rental properties

  2. Dividend income from our ETF's

  3. A tiny amount of interest income

  4. Sally's income from her online teaching

Today I'm only looking at property rental income, in particular:

  • What we earn from our rental properties, and

  • Is property rental the best investment?

What we earn from our rental properties

Our rental portfolio accounts for 57% of our total investments. The remainder is supposed to be mostly in low cost ETF's, but the truth is that we are also currently holding a bunch of cash - a mistake I'm sure, but that's a whole different post.

Over the past 12 months, our rental properties have given us an income after all costs but before tax of £62,940 (€72,381 or $86,228 at today's exchange rates). Here's some more detail, along with figures for the previous few years, for those who are interested:

In 2020/21, our net rental income went down by about 10% compared to the previous year because we removed a property from the portfolio to convert into a second home for our own use.

I know that many people find rental property hard work, but we alleviate most of this by having letting agents manage the properties. They find the tenants, ensure compliance with the ever growing list of regulations, and attend to maintenance and repairs. It's not cheap, around 10% of rental income which knocks ∼0.7% off our returns, but it's a cost we're willing to pay.

So are our rental properties good investments?

  • Our rental return in 2020/21 was 5% calculated on the original purchase price.

  • Recalculating the returns based on current valuations, the return is 3.8%.

  • But including both rent and a conservative view on capital appreciation, the average return is 9.1% based on the original purchase price.

I guess that final bullet is the key figure, and an average annual return of around 9% sounds pretty good to me.

The other good news is that, over the four years of my early retirement so far, the after tax cash flow generated from our rental properties has covered our living costs. We haven't had to draw any other income or eat into the capital of our investments.

Is property rental the best investment?

No, yes,'s impossible to say as it depends on many individual factors. For instance, if I'd bought Bitcoin in the past and still had it today, that would dwarf returns from property, but would also have given me sleepless nights of worrying as it's not something I understand. If something keeps me awake with worry, is that really a good investment?

For Sally and me, we got into rental property because we'd been burned with other investments. Property was an investment we felt comfortable with, that we understood. It got us back in the investment game and so, by that measure, it's been a good investment.

But what about the FIRE community's preferred low cost ETF option, are they better than property rental? In financial terms, if we'd invested in the S&P500 instead of our rental properties, our net worth would be higher than it is today, by a not insignificant amount. Another plus is that ETF's are a very low effort investment. But there are minuses too - Sally doesn't really understand them, feels they are less secure than a property that she can physically see and touch, and also considers the income from ETF's is less predictable compared to the income from rental properties. So again, it's not as simple a question as one might first think.

Where do I stand? Our rental properties have served us well. They helped us return to investing after being burned, which was important. They also provide us with a reliable income stream to pay for our early retirement, which was helpful when I was trying to make my early retirement decision, and is still comforting today. But different from Sally, I have got myself comfortable with ETF's and feel that having 57% of our investment portfolio allocated to rental properties is too much, I would prefer it to be closer to 30%. Guess what, Sally doesn't agree...why does that not surprise me!

Related post: Early retirement passive income - property rental although as this was written a few years ago the values have since changed


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