BTL vs Shares (Funds) vs Alternatives

[simong800]

I am after a bit of insight from the experts if I may! Apologies in advance for the long winded post.

I work for myself, small business with just my business partner and I. Money is fairly good (not sure if it is crude to go into specifics), but we work hard for it. In the office at 7.45am, finish up at 6.45pm etc.Homeowner, 30 y/old, marrying next year, no kids.

We have kept the business small on purpose, the idea of managing people, big overheads etc etc just doesn't interest me, I like being able to just do my job which I had done for years making other people money, but actually doing it for myself. However at some point there needs to be a retirement plan, and I had always thought it would be getting a few buy to lets. The idea of chucking £30k deposit into one a year seemed nice, build up a portfolio, mortgages paid off in 20 years time and retire with a mortgage free portfolio worth x amount generating y amount - easy.

However the more I look into it the more this seems unrealistic for many reasons;

- level of deposit needed, circa 30-40%, and less mortgage products available due to being self employed
- calibre of tenants if buying at £100k would perhaps mean chance of bad tenants are quite high
- new stamp duty/inability to offset mortgage interest for tax purposes
- potential time needed to be dedicated to it, for lower returns than investing the same amount of time into my day job

Currently I have a £20k portfolio of circa 10 funds, this has returned 20% ish over the past year according to Trustnet. I am in a position where I can realistically add say £20k-£40k p/annum to the portfolio. Currently put a nominal £500 p/month into a pension, reason for not contributing more is my intention to not be doing what I do every day until I am 65 or whatever the retirement age at the time is!

I suppose in summary I am trying to ascertain whether I am being short sighted in dismissing buy to let, or whether people feel there is still opportunity out there? It feels like I might have missed the boat on it (wouldn't have been in a position to consider it before now really) but just wanting to sanity check my theory.

And I was also keen to see if I had missed much by way of other alternatives, I suppose the likes of Funding Circle and LendInvest would be interesting for diversity.....

Thanks in advance for any insight.

[audidoody]

BTL is fine - as long as you are prepared to spend great chunks of your life doing the management and dealing with the weekend phone calls that the roof is leaking/the boiler won't turn on etc etc.

In my humble opinion there is only one serious way to make money from property these days. Buy a wreck at auction. Spend £x doing it up. Sell for £X.50. The only other catch is that , to make the sums work, it has to be your only property to avoid the stamp duty surcharge and you have to live in it for a year or so afterwards to avoid the capital gains tax bill.

[Lynch91]

I'm a big fan of shares and funds, however diversification is key. So your other option is to do both and invest in shares, whilst at the same time getting a few btl's?

[rufusgti]

Well you will never make 20% in one year on a BTL, but then I suspect with stocks and shares you're just as likely to lose the 20% over another year at some time. As with either though you haven't made or lost anything until you sell.

With that in mind, and this is the way I see BTL. If I put down 30k on a 120k property, I have invested 30k. Yes, I'm liable for the mortgage, but I don't pay the mortgage, the tenants pay that. So the BTL has cost me so far 30k plus buying costs.
In 25 years, let's say the property hadn't gone up in value at all, still at 120k. There has been some on going costs over that period, but it should all be covered by the rent. So again, i'm not paying for that. At that point the mortgage is payed off and your 30k investment is bringing you in a significant income. Or you can sell and pocket the 120k minus selling costs and tax.

I can't answer this as I'm no expert in stocks and shares. But is it possible to put 30k in S&S and pull out 120k in 25 years? I genuinely don't know. I believe there's still going to be costs involved, I also believe it's not quite as stress free as people claim. I don't know anything about the tax implications either so that needs weighing up.

We can't really read the future on either so look at property and S&S over the last 25 years And pick your winner. But remember that even if your BTL has not increased in value even £1 in 25 years, you have still done extremely well. What happens if 25 years in the stock market proves to give you absolutely no profit? You then still just have 30k. Both are extremely unlikely but can you see how to a degree there's less risk with the BTL.

It does depend on your circumstances however. I'm in the building and maintenance industry. It's my day job, so when my BTL needs work it's just more of the day job. It's not a problem, sometimes a chore, but I know building maintenance inside out. I also bought my first BTL at 27, I'm now 36 and I probably won't buy any more. There's no point buying at 60 and hoping to be mortgage free at 85, that's no good. I know nothing about S&S so believe I'd be poor at it. That means paying people to run it. If you're clueless at property you will end up paying people to run and maintain it.

All my BTL costs are covered by rent. I mean every bit. They have cost me the deposits and nothing else. You need to do your homework and make sure rent covers all costs, all the time.

[sidicks]

rufusgti said:

Well you will never make 20% in one year on a BTL, but then I suspect with stocks and shares you're just as likely to lose the 20% over another year at some time. As with either though you haven't made or lost anything until you sell.

With that in mind, and this is the way I see BTL. If I put down 30k on a 120k property, I have invested 30k. Yes, I'm liable for the mortgage, but I don't pay the mortgage, the tenants pay that. So the BTL has cost me so far 30k plus buying costs.
In 25 years, let's say the property hadn't gone up in value at all, still at 120k. There has been some on going costs over that period, but it should all be covered by the rent. So again, i'm not paying for that. At that point the mortgage is payed off and your 30k investment is bringing you in a significant income. Or you can sell and pocket the 120k minus selling costs and tax.

I can't answer this as I'm no expert in stocks and shares. But is it possible to put 30k in S&S and pull out 120k in 25 years? I genuinely don't know. I believe there's still going to be costs involved, I also believe it's not quite as stress free as people claim. I don't know anything about the tax implications either so that needs weighing up.

We can't really read the future on either so look at property and S&S over the last 25 years And pick your winner. But remember that even if your BTL has not increased in value even £1 in 25 years, you have still done extremely well. What happens if 25 years in the stock market proves to give you absolutely no profit? You then still just have 30k. Both are extremely unlikely but can you see how to a degree there's less risk with the BTL.

It does depend on your circumstances however. I'm in the building and maintenance industry. It's my day job, so when my BTL needs work it's just more of the day job. It's not a problem, sometimes a chore, but I know building maintenance inside out. I also bought my first BTL at 27, I'm now 36 and I probably won't buy any more. There's no point buying at 60 and hoping to be mortgage free at 85, that's no good. I know nothing about S&S so believe I'd be poor at it. That means paying people to run it. If you're clueless at property you will end up paying people to run and maintain it.

All my BTL costs are covered by rent. I mean every bit. They have cost me the deposits and nothing else. You need to do your homework and make sure rent covers all costs, all the time.

The point you are referring to is 'leverage', which is fine when asset prices are going up, less good when they are falling! And property values can fall!

[drainbrain]

I've just sold a small studio flat for £10k. Actually It's one of 10 (entirely unburdened) flats in a portfolio which I've just sold for £212500. For some years these have produced > £3kpcm from a gross achievable of about £4.5k. Some people would say that's >20%. Why do you think "20%" isn't possible?

Two of those flats cost zero, btw. Don't know how you'd express the yield from them as a %age. Base it on the legal costs?

Edited by drainbrain on Tuesday 29th November 21:23

[sidicks]

drainbrain said:

Without any crystal ball skills I'd say that it's unlikely that people (including some very young, low paid and unfortunate People) in the UK won't need a place to stay over the next 20 years and more. With that in mind, buying property (for all levels of affordability) that they can potentially stay in is a fairly safe bet.

Which makes btl a fairly safe bet.

Certainly a safe bet over the (very) long term. The issue of course is the short term and being able to fund the mortgage, ongoing expenses etc in the absence of rental income!

[drainbrain]

rufusgti said:

We can't really read the future on either so look at property and S&S over the last 25 years And pick your winner.

What you CAN say is that people (including and perhaps especially people on low low wages or no wages) will need somewhere to stay. Which makes btl really a rather safe 'bet'.

Can't agree that self-management and self maintenance is a good idea tho' - unless your hourly rate is pretty cheap.

[drainbrain]

sidicks said:

drainbrain said:

Without any crystal ball skills I'd say that it's unlikely that people (including some very young, low paid and unfortunate People) in the UK won't need a place to stay over the next 20 years and more. With that in mind, buying property (for all levels of affordability) that they can potentially stay in is a fairly safe bet.

Which makes btl a fairly safe bet.

Certainly a safe bet over the (very) long term. The issue of course is the short term and being able to fund the mortgage, ongoing expenses etc in the absence of rental income!

Sorry, I deleted the post you quoted above.

BTL doesn't really work as nicely with leverage just now, unless it's on IO and a gamble on future value, or the leverage is tiny. Definitely now a game best played with a pot of cash. But it's only really in the shortest of terms that it needs carried, not to mention the world of buying and selling letting concerns where there's a tenant already in place.

[sidicks]

drainbrain said:

Sorry, I deleted the post you quoted above.

BTL doesn't really work as nicely with leverage just now, unless it's on IO and a gamble on future value, or the leverage is tiny.

Definitely now a game best played with a pot of cash. But it's only really in the shortest of terms that it needs carried, not to mention the world of buying and selling letting concerns where there's a tenant already in place.

Fair enough, but if you're not buying on leverage, then the returns on property (over the long term) are unlikely to exceed those available on equities!

[oldnbold]

I'm with Rufusgti, I also don't understand stocks and shares so have invested in BTL. As mentioned above, with a mortgage you are leveraging your capital. Without getting into specific figures my capital invested returns approx 15% net pa before tax, and has done fairly consistently over the last 5 years. In the same period the property values have increased a modest amount raising my equity in the properties by about 45%.

I agree that property prices can also go down, however in my half century or so on the planet, except for a couple of blips they have been going only one way. By the way all my property is in the Midlands so I'm not part of the SE/London bubble.

Whilst I'm sure some shares can show fantastic returns, there're also some that will produce huge losses. With property however I'm not aware of any area of the country that has seen huge (>40%) reduction in property values in my life time.

[rufusgti]

drainbrain said:

What you CAN say is that people (including and perhaps especially people on low low wages or no wages) will need somewhere to stay. Which makes btl really a rather safe 'bet'.

Can't agree that self-management and self maintenance is a good idea tho' - unless your hourly rate is pretty cheap.

Yes my hourly rate is cheap. I'm not wealthy, just an employed manual worker. I only have two BTL properties so it's not much time, paint a wall, clear the gutters etc. a few hours a month. I know you have BTL on a huge scale, obviously then management is a must. But I've always been happy with self management.

Edited to add that being on 20% tax rate means the tax changes have much less of an impact on me. Like I say it's down to personal circumstances. There's certainly not an end to leveraged BTL, to some people it still makes sense as an investment. A lot depends on what you do with the surplus cash flow from BTL, that can be invested in differen ways. You could sum up an answer to the OP by saying the investment that suits you is the one your happy with.

Edited by rufusgti on Tuesday 29th November 22:56

[drainbrain]

Not that I'm against capital gain - far from it. But when inflation is built into the calculation then the gains can sometimes feel pretty poor. However, I've had a great few decades in btl and would certainly stick all my eggs in it again given the opportunity. Having said that, I've spent the last few years turning a largish leveraged portfolio (100's) into a small and unburdened one with a plan to reduce to 50 over the next 12 months and use some of the capital to diversify into financing redevelopment.

I'm no longer in the agency business but things seem to be becoming increasingly more negative from that perspective. Everything is becoming hugely overburdened with legislation and regulation. The latest thing in Scotland is compulsory regular checking for Legionella. I mean I ask you….Legionella! An agency now has to drag these things, like EPCertifying , Legionella checking, elec appliance checking etc in-house by having a staff member go on whatever training course is required to be able to carry out these functions which of course are then charged to the landlord. But agents want to market and manage properties, not spend their days (and resources) on fairly futile administration exercises that really are of little or no benefit to almost everyone.

Nice to see England following Scotland into banning the 'scam' type agency expenses. We're now in an era where there's no room for any extra costs in finding accommodation and agents really have to recognise that.

[drainbrain]

rufusgti said:

Yes my hourly rate is cheap. I'm not wealthy, just an employed manual worker. I only have two BTL properties so it's not much time, paint a wall, clear the gutters etc. a few hours a month. I know you have BTL on a huge scale, obviously then management is a must. But I've always been happy with self management.

Edited to add that being on 20% tax rate means the tax changes have much less of an impact on me. Like I say it's down to personal circumstances. There's certainly not an end to leveraged BTL, to some people it still makes sense as an investment. A lot depends on what you do with the surplus cash flow from BTL, that can be invested in differen ways. You could sum up an answer to the OP by saying the investment that suits you is the one your happy with.

Edited by rufusgti on Tuesday 29th November 22:56

It's not really the scale, it's the hourly rate that makes the difference. I mean if you earn even £20-£25 an hour, it makes much more sense to do a few hours extra at what you do than spend far more hours doing DIY etc. I'm sure you know what I mean.

But you're missing a great opportunity. If you really CAN handle all the works btls require, including knowing how to skilfully organise the stuff you maybe can't do (gasworks, mains elec works etc) then you are the gold-dust guy every letting agent is looking for. A one-stop-source to organise repairs instead of having to have 50 phone numbers for 50 different trades functions. I currently work with a guy like that. He's become very experienced in knowing exactly the right type and standard of works required by btls and how to get them effectively organised and costed at an acceptable level for landlords, and anyone else who cares to use him. He does the odd bit of hands on, but 90% of his income is from organising rather than grafting. You should phone a few agencies. Seriously. And some of the offshoot work is really pretty interesting too.

[drainbrain]

sidicks said:

Fair enough, but if you're not buying on leverage, then the returns on property (over the long term) are unlikely to exceed those available on equities!

But can you take a pot of cash and invest in equities for income from the get-go - as you can if you buy, say, a tenanted property?

[Yipper]

Shares / funds almost always trump property for returns, ease-of-use, and liquidity.

[NickCQ]

rufusgti said:

Well you will never make 20% in one year on a BTL, but then I suspect with stocks and shares you're just as likely to lose the 20% over another year at some time. As with either though you haven't made or lost anything until you sell.

With that in mind, and this is the way I see BTL. If I put down 30k on a 120k property, I have invested 30k. Yes, I'm liable for the mortgage, but I don't pay the mortgage, the tenants pay that. So the BTL has cost me so far 30k plus buying costs.
In 25 years, let's say the property hadn't gone up in value at all, still at 120k. There has been some on going costs over that period, but it should all be covered by the rent. So again, i'm not paying for that. At that point the mortgage is payed off and your 30k investment is bringing you in a significant income. Or you can sell and pocket the 120k minus selling costs and tax.

I can't answer this as I'm no expert in stocks and shares. But is it possible to put 30k in S&S and pull out 120k in 25 years? I genuinely don't know. I believe there's still going to be costs involved, I also believe it's not quite as stress free as people claim. I don't know anything about the tax implications either so that needs weighing up.

We can't really read the future on either so look at property and S&S over the last 25 years And pick your winner. But remember that even if your BTL has not increased in value even £1 in 25 years, you have still done extremely well. What happens if 25 years in the stock market proves to give you absolutely no profit? You then still just have 30k. Both are extremely unlikely but can you see how to a degree there's less risk with the BTL.

It does depend on your circumstances however. I'm in the building and maintenance industry. It's my day job, so when my BTL needs work it's just more of the day job. It's not a problem, sometimes a chore, but I know building maintenance inside out. I also bought my first BTL at 27, I'm now 36 and I probably won't buy any more. There's no point buying at 60 and hoping to be mortgage free at 85, that's no good. I know nothing about S&S so believe I'd be poor at it. That means paying people to run it. If you're clueless at property you will end up paying people to run and maintain it.

All my BTL costs are covered by rent. I mean every bit. They have cost me the deposits and nothing else. You need to do your homework and make sure rent covers all costs, all the time.

Most BTL mortgages these days are I/O, so it is unlikely that you will pay down the principal balance significantly through the lifetime of the loan. I read a UBS research report that estimates that after the recent BTL tax changes the expected net yield on an average BTL is 0%, i.e. there is no cash left over from the rental income after paying interest, maintenance and taxes. You'd have to do your own numbers but it's not going to be great.

S&S ISA really is the hassle free solution. Invest £20k per annum totally tax free in low cost index tracker funds and over a long enough time period you will make the compound market return, which for equities is between 5 and 10%. You may do slightly better or worse depending on when you buy in and when you liquidate. But if you are cost averaging properly on entry you can also reduce those risks, similarly if you carry out a phased liquidation of your portfolio in retirement. It takes me approximately 1 hour at the beginning of each financial year to transfer £20k to my S&S ISA, select funds and invest. Then I go back to my day job for another year (and posting drivel on PH of course).

But... your upside is much lower vs property. If your 75% leveraged BTL goes up in value by 50% (not unheard of in the UK market), then you have made 3x your money on the equity before rental income or taxes. Hard to achieve with S&P / FTSE trackers in a reasonable timeframe. But if the property goes down by 25%, then you have lost all your money - as sidicks says this is the power of leverage.

[simong800]

Interesting comments here chaps, thanks. Many are as I expected and give further food for thought.

I am definitely not hands on and wouldn't have the time or any inclination to do any work myself at all. So any maintenance costs would be a definite factor on a BTL for me. If a wall needed painting there is zero point in me doing it when I could be in the office doing my day job which pays more than getting a wall painted costs if that makes sense. Which I suppose automatically puts me at a disadvantage.

I am in the 40% tax band too which is a big factor.

Ref Stocks and Shares, all my investments are and would continue to be in funds. So someone who knows a heap more than me is picking what the money is invested in, and it is invested across a huge range of companies offering diversity (some big, some small, different geographical areas etc etc). Definitely do appreciate there is still risk here though....

[simong800]

rufusgti said:

Well you will never make 20% in one year on a BTL, but then I suspect with stocks and shares you're just as likely to lose the 20% over another year at some time. As with either though you haven't made or lost anything until you sell.

With that in mind, and this is the way I see BTL. If I put down 30k on a 120k property, I have invested 30k. Yes, I'm liable for the mortgage, but I don't pay the mortgage, the tenants pay that. So the BTL has cost me so far 30k plus buying costs.
In 25 years, let's say the property hadn't gone up in value at all, still at 120k. There has been some on going costs over that period, but it should all be covered by the rent. So again, i'm not paying for that. At that point the mortgage is payed off and your 30k investment is bringing you in a significant income. Or you can sell and pocket the 120k minus selling costs and tax.

I can't answer this as I'm no expert in stocks and shares. But is it possible to put 30k in S&S and pull out 120k in 25 years? I genuinely don't know. I believe there's still going to be costs involved, I also believe it's not quite as stress free as people claim. I don't know anything about the tax implications either so that needs weighing up.

We can't really read the future on either so look at property and S&S over the last 25 years And pick your winner. But remember that even if your BTL has not increased in value even £1 in 25 years, you have still done extremely well. What happens if 25 years in the stock market proves to give you absolutely no profit? You then still just have 30k. Both are extremely unlikely but can you see how to a degree there's less risk with the BTL.

It does depend on your circumstances however. I'm in the building and maintenance industry. It's my day job, so when my BTL needs work it's just more of the day job. It's not a problem, sometimes a chore, but I know building maintenance inside out. I also bought my first BTL at 27, I'm now 36 and I probably won't buy any more. There's no point buying at 60 and hoping to be mortgage free at 85, that's no good. I know nothing about S&S so believe I'd be poor at it. That means paying people to run it. If you're clueless at property you will end up paying people to run and maintain it.

All my BTL costs are covered by rent. I mean every bit. They have cost me the deposits and nothing else. You need to do your homework and make sure rent covers all costs, all the time.

Being in the industry definitely helps, I fear that not being in it is potentially a disadvantage to the extent it almost makes it prohibitive when I actually think about some of the logistics.....thanks for highlighting this.

To answer your question on the performance of the stock market over 25 years, this article here suggests that £50k invested in the FTSE All Share 25 years ago (presumably with all dividends reinvested) would be worth £423k today. Which would be nice!

http://www.thisismoney.co.uk/money/investing/artic...

Doing as much reading as I can on it and I found this article particularly eye opening.

The fact you can now put £20k a year into an ISA (as of April) and have £20k a year invested in stocks and shares (either direct holdings or funds) totally sheltered from any tax is quite attractive.

[simong800]

drainbrain said:

Sorry, I deleted the post you quoted above.

BTL doesn't really work as nicely with leverage just now, unless it's on IO and a gamble on future value, or the leverage is tiny. Definitely now a game best played with a pot of cash. But it's only really in the shortest of terms that it needs carried, not to mention the world of buying and selling letting concerns where there's a tenant already in place.

Yes I was surprised at how high the "price of entry" is now in terms of deposit requirements. Did it always used to be 35-40% needed?