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New investor - strugling to see benefit of BTL property vs stocks index tracker in ISA


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Hi,

I’m a new to property and considering my first BTL investment in 2021. My goal: I am looking at property as a means to generate £3000 per month post-tax income in 7 years’ time. 

I would like to get your feedback on my calculations and assumptions, as I am struggling to see a significant benefit of property vs keeping my money in an equity index tracker in an ISA (currently averaging 10% annual growth, tax free).  

I can see that if I just had the single property, then keeping my money in an equity index tracker in an ISA would provide a better return over a 25 year period. But property provides a better return if I refinance to extract my capital and buy a second property (and so on). However, my key sticking-point is that it will take about 9 years to have the required capital growth and accumulated rental income to get to a point where I can refinance to buy my second property. This seems like a very slow method and I would be interested in building a portfolio quicker than this. 

Here is the link to my calculation of buying a BTL in a LTD company https://drive.google.com/file/d/1VVuyg2DDsZ_HcvPgTeWqJMgibRVP4uYu/view?usp=sharing and I have included my top line numbers below. 

Am I missing something here or are my numbers too conversative?  How long did it take you to refinance your property and extract your capital? How could I move things along quicker?

If anyone fancies a longer conversation on the topic, I'd be happy to have chat with you :)

Many thanks and a happy new year,
Sam

______________

CALCULATIONS/ASSUMPTIONS

PROPERTY RENTAL FIGURES
•    Property cost £80k
•    75% mortgage, and £20k deposit
•    12k buying costs (redecorate, furnish, legal and search fees, broker, surveys, mortgage arrangement and stamp duty)
•    Total cash needed £32k
•    10% gross rental yield: £8000 annual income
•    1 month void, so £7,333 net annual income
•    £4,567 annual expenses (62%) – interest, repairs & maintenance, management, insurance, accounting.
•    £2,767 profit before tax (38%)  
•    £2241 profit after corporation tax

REFINACE CALULATION
•    6% annual property appreciation
•    --> 9 year to refinance: £32k available based on appreciation and accumulated post tax income


 

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Hi Sam,

I'm afraid I'm not going to be able to add at lot of value to this as am in a similar position to you, but this topic is also interesting to me and I'd be keen to hear if anybody can offer any words from experience :)

Thanks

Ben

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It's really difficult to compare a S&S ISA with a BTL because there are so many unknowns. The big difference is you can borrow money to buy a property so you can make money on your money & the banks. You also own a physical asset so if the world crashes around you you own something with value. Stocks & Shares can crash (although they usually recover quite quickly) but they never need a new boiler or trash the carpets!

I have a mix of both as they move in different ways at different times and so my overall risk is exposed by diversification.

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Hi Sam

I am not a hugely experienced investor (albeit I have read a lot) but perhaps some slight tweaks might make the numbers look different. Firstly, if you are buying a property that needs £4000 redecorating it then I would expect some uplift in the value of the property - so your purchase price should be at least proportionately lower than comparable nearby properties. Secondly, the £4000 you are spending can be classed as a revenue expense if you are only redecorating rather than making capital improvements. As I understanding it this allows you to offset tax on the first £4000 of rental income which makes your first year or two look much better in terms of revenue retained therefore allowing you to accumulate faster towards your next property.

Out of interest how were you planning to reach £3000 income/month with stocks and shares without a lot more capital?

Chris

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Hi Sam,

Interesting topic and one that we'll be writing about soon. 

You can improve your yield by cutting out some costs:
- mortgage broker. There are plenty of mortgage brokers that only finance themselves via the fee the lenders pay. They are just as good. You can save those £500 in one off costs.
- lettings agent. No need to pay £1100 to a lettings agent, there's Openrent (£60 per tenancy) and Mashroom (free listing // disclaimer: I work there) who can list your property for pennies. You can get your AST contract online and edit it yourself, then recycle it with every tenancy.

Some of the risks you may not be considering on the stocks and shares side:
- You're much more likely to experience capital losses compared to property. There's always going to be some value to your property unless something happens to the area you live in and property prices drop massively (thinking of Aberdeen and it's oil industry exposure). With stocks you can easily see some losses or even bankruptcies. An index fund will mitigate some of that risk but just look at the FTSE100 over the last couple of years.

At the end of the day, I think it comes down to personal preference and what you are comfortable with.
 

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If you want £3000pm net as an income, in an ISA/pension/GIA you're going to need at least £900k invested, using the 4% rule. Many now believe that's optimistic, especially for longer periods, so you might want to reduce that to say a 3.5% withdrawal rate, so probably £1m to be safe. Unless all of that was in an ISA, there could be tax implications in the growth and withdrawing it, so you'd need to work that it. 

I totally disagree with the point about potentially losing money in a S&S ISA. Invest in a passive global tracker (rather than individual shares or an individual market like the UK) and it will be down some years, but you'll never lose your money and the 4% rule takes into account that the fund would be down in some years.

So if you've got that much cash, or can build to in over the next 7 years, that would definitely be the best route, as at the end of it, you can go lie on a beach or whatever leave Elon Musk and Jeff Bezos to work for you.

The benefit of property is that you don't need £1m to generate the same returns, due to leverage and the potential to grow the capital you employ through refurbishment and capital gains, although 7 years is too short a period to be confident of the latter, especially in the current situation.

In terms of your numbers, I'd have a few concerns. 6% growth every year would be lovely, but is unlikely unless we end up in some sort of inflationary cycle pushing wages up. You might find some areas that achieve it if you cherry pick years, but that's easier in hindsight. An £80k property is also unlikely to be in one of the areas that achieves that sort of growth, as they'll generally be property in less desirable areas of larger cities or in smaller towns which don't have the economic growth to push house prices up.

I'd also be surprised if you could find an £80k property that rents out for £650pm. If it's a property that needs a fair bit of refurbishment i.e. more than paint and carpets, you might find you can't get a BTL mortgage, so would need to start in cash, wait 6 months and then start the remortgage process. That will improve your yield, but slows things down and takes a lot more effort.

So would I recommend S&S or BTL? I'd say both, which is exactly what I've done. There are some advantages to BTL, although it's probably more tax efficient now in a ltd company, but that brings about additional costs that aren't worth it for one or two unless both the rent and mortgage are very high e.g. London. S&S remove all the hassle, but you don't get the additional leverage at the start. When you come to extract the money, as Julia says, having both provides more diversification and the opportunity to pull money from wherever is most cash efficient and least risk to your overall portfolio.

Unless you've got a lot of money already sat there, you're not going to get to £3k a month with S&S in 7 years, as you're not allowing enough time for the investment to compound. With property it's possible if you refurbish and refinance, but you're still going to need a lot of money. The benefit is it doesn't need to all be yours i.e. you can take out bridging loans as long as you've got something to start with, but that is either going to take a lot of effort i.e. a full time job at it or you're going to need to spend more to outsource the management of the refurb.

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My strategy has always been all 3  (not everyone can follow this as it does depend on current job/salary/etc)

1. pension investment with 40%+ tax benefit - you arebasically investing double what you would if you took the cash and invested in property

2. property via ltd to take advantage of various benefits

3. isa - global tracker and ignore for a decade

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12 minutes ago, haf1963 said:

My strategy has always been all 3  (not everyone can follow this as it does depend on current job/salary/etc)

1. pension investment with 40%+ tax benefit - you arebasically investing double what you would if you took the cash and invested in property

2. property via ltd to take advantage of various benefits

3. isa - global tracker and ignore for a decade

And the mix depends on your salary and exit strategy. When do you stop working. Sipp can't be taken before 55. Isa needs compound interest/time. Property needs lump sum to initial invest. 

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1 hour ago, carl o said:

And the mix depends on your salary and exit strategy. When do you stop working. Sipp can't be taken before 55. Isa needs compound interest/time. Property needs lump sum to initial invest. 

Yes you are 100% correct and hence any strategy has to be very dependent on personal circumstances - the key is to be fully informed of all the details - especially tax advantages/disadvantages-  of the different scenarios. Things like timescales as well as whether its a side business or the intention is to go full time are all major factors that will influence the 'best approach'. Its no different when choosing which property strategy to adopt (i have done, at a very small scale,  flats/houses/commercial/new-build) and each has totally different reasons why they are the best strategy.

There are just too many variables to simply say anything one thing is better than another. I know a youngster who is making 4k a month on youtube adverts so he would say we are all wasting our time with property and pension.

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22 hours ago, haf1963 said:

3. isa - global tracker and ignore for a decade

By being a little more adventurous you can improve on the S&S returns.

Look at Fundsmith / Scottish Mortgage IT / L&G US tracker / L&G Global Tech / Lindsell Train Global Equity / Monks IT for investments that have really returned above average returns over the last year.

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56 minutes ago, julia urquhart said:

By being a little more adventurous you can improve on the S&S returns.

Look at Fundsmith / Scottish Mortgage IT / L&G US tracker / L&G Global Tech / Lindsell Train Global Equity / Monks IT for investments that have really returned above average returns over the last year.

Past performance...

Very few funds beat the average over the longer term, especially once fees are taken into account and you can only know which in hindsight.

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I have looked long at hard at index versus managed funds and for the 'average' investor who is 'low risk' and not wanting to spend lots of time studying markets then the Index trackers are the way to go (unless you are high net worth and paying a financial advisor etc). For those with a riskier mindset and willing to educate themeselves, then some managed funds are worth going for. I have mainly global trackers but also a few managed funds for more risk/reward areas.

No different to passive property investors who leave everything to agents/brokers etc and sit back having no involvement versus those who are very active in their property portfolio.

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If you want to make money you need to invest time and effort - whether property or stocks and shares. Hence the saying 'the harder I work the luckier I get'.

I really don't believe in the 'buy and forget about it' strategy. I actively manage my properties and my investments. Profit taking and reinvesting in dips in the market is no different to remortgaging and buying another property. When markets crashed last spring I sold early, bought near the bottom and benefited from all the subsequent growth - yes it was a bit hairy but my goodness it was worthwhile! A bit like buying a run down property and refurbishing and selling at a profit. Both call for nerves of steel from time to time!

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1 hour ago, julia urquhart said:

If you want to make money you need to invest time and effort - whether property or stocks and shares. Hence the saying 'the harder I work the luckier I get'.

I really don't believe in the 'buy and forget about it' strategy. I actively manage my properties and my investments. Profit taking and reinvesting in dips in the market is no different to remortgaging and buying another property. When markets crashed last spring I sold early, bought near the bottom and benefited from all the subsequent growth - yes it was a bit hairy but my goodness it was worthwhile! A bit like buying a run down property and refurbishing and selling at a profit. Both call for nerves of steel from time to time!

I thinkthere is evidence that there are more losers than winners when it comes to the average investor trying to be clever. There will always be some who take more risk and get more reward - and have nerves of steel - verus others who are looking for a low risk long term investment while they get on with the rest of their life.. Takes all sorts and you def did well to sell/buy in timing the market in 2020...

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On 1/11/2021 at 9:47 AM, haf1963 said:

My strategy has always been all 3  (not everyone can follow this as it does depend on current job/salary/etc)

1. pension investment with 40%+ tax benefit - you arebasically investing double what you would if you took the cash and invested in property

2. property via ltd to take advantage of various benefits

3. isa - global tracker and ignore for a decade

This sounds like a sensible approach. Originally, I only wanted to invest in property for my retirement, but have been dabbling in S&S via those apps like Freetrade over the past year, it got me thinking about doing it through a company like HL or Vanguard. Does anyone have any particular companies they invest through? Looking at doing a SIPP as well as something like an S&S ISA , any information would be helpful, its a minefield?

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I have been using HL for a number of years and I really like the platform. They offer all the funds / shares / ITs I want and you can hold a SIPP, ISA and funds all on the same platform. Lots of information available and I find it easy to navigate. Other platforms maybe slightly cheaper but I have tried several others over the years like HL the most.

On 1/13/2021 at 3:48 PM, haf1963 said:

I thinkthere is evidence that there are more losers than winners when it comes to the average investor trying to be clever. There will always be some who take more risk and get more reward - and have nerves of steel - verus others who are looking for a low risk long term investment while they get on with the rest of their life.. Takes all sorts and you def did well to sell/buy in timing the market in 2020...

I don't think making money in S&S ISA is that hard. There are some simple rules to follow - invest for the long term; understand what you are investing in (that's why I don't do bitcoin), don't try to time the market (but do look for dips to invest in). Past performance is not a guide to future performance - but it is quite a good indicator! Don't sell when the market has fallen - this is the time to buy - and don't buy when the market is really high - but maybe bank a little profit. Use your head not your heart and only invest money you are not going to need suddenly - its not a loss until you actually sell!

Start small and watch and learn. I've been at this as long as I have been a BTL investor and what I like is that the two areas often move in different ways at different times. Diversification is really important and having the two side by side gives me flexibility.

I would recommend starting with a monthly investment of a small sum and see how it goes. Once you start making money you will get the bug - even my kids have!

Good luck :)

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2 minutes ago, haf1963 said:

For anyone wanting to start out and keep a low risk profile then you cant do much better than Vanguard and one of their global tracker funds - low cost and can be used in ISA or SIPP

They are great 😁

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I share the same concerns as yourself and I too would be a new investor into this space if I decide to invest into the sector. My conclusion was that a corporate holding is far too expensive for cheaper properties and requires a large enough portfolio such that the tax benefit offsets the higher costs to operate an SPV. Meanwhile a property bought under your own name would return a very slim annual return, given the risk anad effort, and I can't help but think an ISA is a better alternative. 

The models I built are here if you are interested in my analysis

Corporate BTL Model (Microsoft One Drive)

Personal BTL Model (Microsoft One Drive)

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To those whose perpetuate the argument that an amateur investor is unlikely to be able to do well in stocks & shares, that it is hard to beat an index, that past performance cannot be relied upon, I refer you to the annual returns posted by Fundsmith - draw you own conclusions:

 

Screenshot 2021-01-20 at 11.46.46.png

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Hi – thanks for all your responses. Sorry, being slow to get back to you. I didn’t have notifications turned on and was pleasantly surprised to see all the replies!

I have really enjoyed reading all the debate on this topic. It’s been great getting this range of perspective.

My takeaways from reading this area:
a)    A diversified strategy i.e., property and S&S ISA (an index tracker) – seems like a solid option to building long term wealth. Especially with property in the mix as you can take advantage of debt.
b)    With property, if I want  higher and faster returns = more effort from me. Which is something that’s good to keep in mind and be honest about.
c)    I have a couple of tweaks to make to the spreadsheet - thanks for your suggestions (on that topic if people want to steal it for themselves, go for it)

If there are any other newbie investors out there who want to share perspectives or bounce ideas around as you too get started, I’d be open to chatting. 

All the best with each of your property journey’s

Sam 
 

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To address your query about getting your capital back out, and has been mentioned in a previous post in various guises - the more you put in the more you'll get out.

So, add value to a property. That is the key if you want quicker returns. Either buy well below true value (plenty of debate around BMV...), or add value through renovation, extension etc. Then refinance at the higher value to get most or all of your initial investment back out. Hey presto - buy the next one while getting income from the first.

Bear in mind this is essentially a full time occupation. Hence, the more you put in, the more you'll get out.

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On 1/20/2021 at 11:51 AM, julia urquhart said:

To those whose perpetuate the argument that an amateur investor is unlikely to be able to do well in stocks & shares, that it is hard to beat an index, that past performance cannot be relied upon, I refer you to the annual returns posted by Fundsmith - draw you own conclusions:

 

Screenshot 2021-01-20 at 11.46.46.png

'Investment fund provides chart that shows it did better than a fund chosen at the end of the period'. What a shock.

Hard to tell from the website, but don't think the costs of the fund are included, not least as the cost doesn't even appear to be on the website, I had to Google for them.

Smith is currently one of the ones beating the market, whatever you want to class that as. There have been plenty before him there will be plenty after him, but there's a huge risk they get it very wrong at any point going forwards. Funds that start to perform badly get dropped and changed into new funds, hence not a lot of data is ever available about current funds that have performed badly as they stop existing. 

I'm happy that people continue to invest in either single shares or via active funds, as without them, the passive funds wouldn't work, but caveat emptor for anyone considering one - Neil Woodford had spectacular returns for a while

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15 minutes ago, dino v said:

'Investment fund provides chart that shows it did better than a fund chosen at the end of the period'. What a shock.

Hard to tell from the website, but don't think the costs of the fund are included, not least as the cost doesn't even appear to be on the website, I had to Google for them.

Smith is currently one of the ones beating the market, whatever you want to class that as. There have been plenty before him there will be plenty after him, but there's a huge risk they get it very wrong at any point going forwards. Funds that start to perform badly get dropped and changed into new funds, hence not a lot of data is ever available about current funds that have performed badly as they stop existing. 

I'm happy that people continue to invest in either single shares or via active funds, as without them, the passive funds wouldn't work, but caveat emptor for anyone considering one - Neil Woodford had spectacular returns for a while

Ok - so firstly these returns are annual returns for each year - no fudging there.  Secondly charges are on the website on the 'key facts' documents. Thirdly Fundsmith have been outperforming the market since 2010 - ok he may not be able to do it forever but 10 years is a pretty good run (449% increase by the way!) If the performance starts to drop you can switch. I accept your example of  Neil Woodford, but his 'spectacular returns' lasted abut 20 years and I had switched out long before his calamitous fall when his results dipped. I am not saying put all your eggs in one basket and then walk away - we don't do that with property - what I am saying is there are better returns out there if you are prepared to do your homework.

No one should expect great returns with no effort but with a little effort better returns can be had. I am not against index trackers per se - L&G US index is a great way to invest in the biggest economy in the world and hard to beat in that area and I have always liked a FTSE 250 tracker, but what I am saying is there are even better returns available if you are prepared to get involved.

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