What is a rule of thumb for accruing debt on a rental property?
To start, I hope you are aware that the properties' basis gets stepped up to market value on inheritance.  The new basis is the start for the depreciation that must be applied each year after being placed in service as rental units. This is not optional. Upon selling the units, depreciation is recaptured whether it's taken each year or not. There is no rule of thumb for such matters. Some owners would simply collect the rent, keep a reserve for expenses or empty units, and pocket the difference. Others would refinance to take cash out and leverage to buy more property. The banker is not your friend, by the way. He is a salesman looking to get his cut. The market has had a good recent run, doubling from its lows. Right now, I'm not rushing to prepay my 3.5% mortgage sooner than it's due, nor am I looking to pull out $500K to throw into the market.  Your proposal may very well work if the market sees a return higher than the mortgage rate. On the flip side I'm compelled to ask - if the market drops 40% right after you buy in, will you lose sleep?  And a fellow poster (@littleadv) is whispering to me - ask a pro if the tax on a rental mortgage is still deductible when used for other purposes, e.g. a stock purchase unrelated to the properties.   Last, there are those who suggest that if you want to keep investing in real estate, leverage is fine as long as the numbers work. From the scenario you described, you plan to leverage into an already pretty high (in terms of PE10) and simply magnifying your risk.
Your post seems to read as if you want to invest only in real estate rental properties as a start because they will be a reliable investment guaranteed to generate profits that you will be plowing back into buying even more rental properties, but you are willing to consider (possibly in later years) other forms of investment (in real estate) that will not require active  participation in the management of the rental properties. While many participants here do own rental real estate and even manage it entirely, for most people, that is only a small part of their investment portfolio, and I suspect that hardly any will recommend real estate as the only investment the way you seem to want to do. Also, you might want to look more closely at the realities of rental real estate  operations before jumping in. Things are not necessarily as rosy as they appear to you now.  Not all your units will be rented all the time, and the rental income might not always be enough to cover the mortgage payments and the property taxes and the insurance payments and the repairs and maintenance and ... Depreciation of the property is another matter that you might not have thought about. That being said, you can invest in real estate through real estate investment trusts (REITs) or through limited partnerships where you have only a passive role.  There are even mutual funds that invest in REITs or in REIT indexes. It is easier to get a loan on a rental than a flip, which is a huge advantage to rental properties. Leverage allows you to increase your returns and make more money off appreciation and higher rents. I use ARMs to finance my rental properties that are amortized over 30 years. I have to put 20 percent down, but my portfolio lender lets me get as many loans as I want. Because I put 20 percent down on my rental properties and they still have great cash flow I can buy three times as many properties as I could with cash purchases.  Buying more rental properties amplifies the other advantages like cash flow, equity pay down and the tax advantages. I don't know of any rule of thumb for travel. In general, what you spend on entertainment should be what you have left after paying for the more mundane things in life -- housing, food, electricity, and so on -- and setting aside reasonable amounts for retirement and emergencies. Entertainment varies widely as a percentage of one's income. Someone making minimum wage and trying to support a sick wife and three kids probably has pretty much zero left over for entertainment. Someone who makes a million a year and has no debts might spend 50% or more of his income on entertainment. Yes, I've heard rules of thumb for charity, housing, and retirement that are probably at least useful ballparks. But for entertainment? No, I think that's just what's left over. A common rule of thumb is the 28/36 ratio. It's described here. In your case, with a gross (?) salary of £50,000, that means that you should spend no more than 28% of it, or £1,167 per month on housing. You may be able to swing a bit more because you have no debts and a modest amount in your savings. The 36% part comes in as the amount you can spend servicing all your debt, including mortgage. In your case, based on a gross (?) salary of £50,000, that'd be £1,500 per month. Again, that is to cover your housing costs and any additional debt you are servicing. So, you need to figure out how much you could bring in through rent to make up the rest. As at least one other person has commented, the rule of thumb is that your mortgage should be no more than 2.5 - 3 times your income. I personally think you are not a good candidate for a mortgage of the size you are discussing. That said, I no longer live in England. If you could feel fairly secure getting someone to pay you enough in rent to bring down your total mortgage and loan repayment amounts to £1,500 or so a month, you may want to consider it. Remember, though, that it may not always be easy to find renters. "As others have pointed out, you can't just pick a favorable number and rent for that amount. If you want to rent out your house, you must rent it for a value that a renter would agree to.  For example there is a house on my street that has been looking for renters for 3 years. They want $2,500 a month. This covers their mortgage, and a little bit more for taxes and repairs. It has never been rented once. Other homes in my neighborhood rent for around $1,000 a month. There is no value to a renter in renting a house that is $1,500 more then a similar house 2 doors down. Now what you can look at is cost mitigation. So I am using data from my area. Houses in my part of Florida must have A/C running in the wet months to keep the moisture from ruining the house. This can easily be $100 a month (usually more). The city requires you to have water service, even when not occupied, though the cost is very small. Same with waste, which is a flat fee: $20 a month. Yard watering is a must during the dry months (if you want to keep grass). Let's say that comes out to $50 a month, year round. Pest control is a must, especially if your house has wooden parts (like floors or a roof). Even modest pest control is $25 a month. Property taxes around $240 a month. Let's say your mortgage is around $1,000 a month. That means to sit empty your house would cost $1,435. Now if you were to rent the house, a lot of those costs could ""go away"" by becoming the tenants' responsibility. Your cost of the house sitting full would be $1,240. Let's pad that with 10% for repairs and go with $1,364. Now let's assume you can rent for $1,000 a month. Keep in mind all these rates are about right for my area but will change based on size and amenities.  Your choices are let the house sit empty for $1,435 a month or fill it and only ""lose"" $240 a month. Keep in mind that in both cases you will be gaining equity.  So what a lot of people do around here is rent out their houses and pay the $240 as an investment. For every $240 they pay, they get $1,000 in equity (well, interest and fees aside, but you get the point). It's not a money maker for them right now, but as they get older two things happen. That $240 a month ""payment"" pays off their mortgage, so they end up owning the house outright. Then that $240 a month payment turns to extra income. And at some point, their rental can be sold for (let's guess) $400,000. SO they paid $86,400 and got back $400,000. All the while they are building equity in their rental and in the home they are living in.  The important take away from this, is that it's not a source of income for the landlord as much as it is an investment. You will likely not be able to rent a house for more then a mortgage + costs + taxes, but it does make a good investment vehicle." "I think we'd need to look at actual numbers to see where you're running into trouble. I'm also a little confused by your use of the term ""unexpected expenses"". You seem to be using that to describe expenses that are quite regular, that occur every X months, and so are totally expected. But assuming this is just some clumsy wording ... Here's the thing: Start out by taking the amount of each expense, divided by the number of months between occurrences. This is the monthly cost of each expense. Add all these up. This is the amount that you should be setting aside every month for these expenses, once you get a ""base amount"" set up. So to take a simple example: Say you have to pay property taxes of $1200 twice a year. So that's $1200 every 6 months = $200 per month. Also say you have to pay a water bill once every 3 months that's typically $90. So $90 divided by 3 = $30. Assuming that was it, in the long term you'd need to put aside $230 per month to stay even. I say ""in the long term"" because when you're just starting, you need to put aside an amount sufficient that your balance won't fall below zero. The easiest way to do this is to just set up a chart where you start from zero and add (in this example) $230 each month, and then subtract the amount of the bills when they will hit. Do this for some reasonable time in the future, say one year. Find the biggest negative balance. If you can add this amount to get started, you'll be safe. If not, add this amount divided by the number of months from now until it occurs and make that a temporary addition to your deposits. Check if you now are safely always positive. If not, repeat the process for the next biggest negative. For example, let's say the property tax bills are April and October and the water bills are February, May, August, and November. Then your chart would look like this: The biggest negative is -370 in April. So you have to add $370 in the first 4 months, or $92.50 per month. Let's say $93. That would give: Now you stay at least barely above water for the whole year. You could extend the chart our further, but odds are the exact numbers will change next year and you'll have to recalculate anyway. The more irregular the expenses, the more you  will build up just before the big expense hits. But that's the whole point of saving for these, right? If a $1200 bill is coming next week and you don't have close to $1200 saved up in the account, where is the money coming from? If you have enough spare cash that you can just take the $1200 out of what you would have spent on lunch tomorrow, then you don't need this sort of account." Diversification is one aspect to this question, and Dr Fred touches on its relationship to risk.  Another aspect is leverage: So it again comes down to your appetite for risk.  A further factor is that if you are successfully renting out your property, someone else is effectively buying that asset for you, or at least paying the interest on the mortgage. Just bear in mind that if you get into a situation where you have 10 properties and the rent on them all falls at the same time as the property market crashes (sound familiar?) then you can be left on the hook for a lot of interest payments and your assets may not cover your liabilities. "To be completely honest, I think that a target of 10-15% is very high and if there were an easy way to attain it, everyone would do it. If you want to have such a high return, you'll always have the risk of losing the same amount of money. Option 1 I personally think that you can make the highest return if you invest in real estate, and actively manage your property(s). If you do this well with short term rental and/or Airbnb I think you can make healthy returns BUT it will cost a lot of time and effort which may diminish its appeal. Think about talking to your estate agent to find renters, or always ensuring your AirBnB place is in good nick so you get a high rating and keep getting good customers. If you're looking for ""passive"" income, I don't think this is a good choice. Also make sure you take note of karancan's point of costs. No matter what you plan for, your costs will always be higher than you think. Think about water damage, a tenant that breaks things/doesn't take care of stuff etc. Option 2 I think taking a loan is unnecessarily risky if you're in good financial shape (as it seems), unless you're gonna buy a house with a mortgage and live in it. Option 3 I think your best option is to buy bonds and shares. You can follow karancan's 100 minus your age rule, which seems very reasonable (personally I invest all my money in shares because that's how my father brought me up, but it's really a matter of taste. Both can be risky though bonds are usually safer). I think I should note that you cannot expect a return of 10% or more because, as everyone always says, if there were a way to guarantee it, everyone would do it. You say you don't have any idea how this works so I'd go to my bank and ask them. You probably have access to private banking so that should mean someone will be able to sit you down and talk you through. Also look at other banks that have better rates and/or pretend you're leaving your bank to negotiate a better deal. If I were you I'd invest in blue chips (big international companies listed on the main indeces (DAX, FTSE 100, Dow Jones)), or (passively managed) mutual funds/ETFs that track these indeces. Just remember to diversify by country and industry a bit. Note: i would not buy the vehicles/plans that my bank (no matter what they promise, and they promise a lot) suggest because if you do that then the bank always takes a cut off your money. TlDr, dont expect to make 10-15% on a passive investment and do what a lot of others do: shares and bonds. Also make sure you get a lot of peoples opinions :)"