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  • FIRST POST
    • irobot8
    • By irobot8 11th Nov 17, 12:32 PM
    • 22Posts
    • 3Thanks
    irobot8
    Collective Investment vs Property as investment
    • #1
    • 11th Nov 17, 12:32 PM
    Collective Investment vs Property as investment 11th Nov 17 at 12:32 PM
    Hello all,

    My wife inherited £300K around 2 years ago. We already have a Buy-To-Let, which
    brings in an income of around £800 per month after maintenance/expenses. In the
    interests of diversifying, we explored options other than BTL for investing the
    inheritance with an FA, and ended up putting it into a Collective Investment
    account that invests in a range of different investments, including unit trusts
    and open-ended investment companies (OEICs). The risk level on the account portfolio is fairly low (3/10), mainly due to my wife's higher aversion to risk ;-)

    Initially, we drew an income of £600 per month from the Collective Investment
    account. However, after reviewing its performance after a year and a half, it
    appears that the % growth after income drawdown and fees was not keeping up with
    inflation. As such, we stopped taking an income from the account in order that
    the inheritance is not eroded.

    Recently, I came across this in The Telegraph online:
    Historical data suggests that returns from the stock market are comparable with
    house price rises, but this stacks up only if you reinvest dividend income from
    shares...
    There is no escaping the fact that, for 20 years or so, capital gains on the

    average UK property have easily exceeded capital gains on shares when dividend
    income has been taken.

    As such, I'm thinking that we should ditch the Collective Investment and just get another Buy-To-Let! OK - there would be the risk of no diversification and lack of immediate access to the money
    - but at least we'd get an income from the rent.

    Can anyone persuade me that we'd be better off keeping the inheritance in the Collective Investment account?

    Many thanks in advance for any advice.

    IR8
Page 2
    • irobot8
    • By irobot8 11th Nov 17, 6:53 PM
    • 22 Posts
    • 3 Thanks
    irobot8
    How is a second BTL diversifying? The housing market next few years is likely to be unstable.
    Originally posted by pavane

    I probably didn't explain that too well. Keeping the Collective Investment account would be our diversifying option, and we'd be losing the diversification by buying a second BTL.
    • Audaxer
    • By Audaxer 11th Nov 17, 7:01 PM
    • 587 Posts
    • 255 Thanks
    Audaxer
    Equity (mostly international) is at 38%, fixed interest (mostly UK Bonds) 32%, cash 27% and property 3%
    Originally posted by irobot8
    Seems a lot of cash if that is inside the portfolio of Collective Investments? In my view there is nothing wrong with keeping a large cash buffer, but if it's part of the portfolio and you are also being charged at 1% per annum on the cash element that doesn't seem right.
    • bowlhead99
    • By bowlhead99 11th Nov 17, 8:21 PM
    • 6,897 Posts
    • 12,410 Thanks
    bowlhead99
    I would put own house purchase (again if a long term asset) well before investment but that is open to debate.
    Originally posted by Ainsley1
    Realise that it's open to debate, but (in your opinion) would you tend to say that's the case regardless of the current unstable/stagnant housing market - or otherwise would you say there's a "right time to buy", even if it's the purchase of your own home?
    Originally posted by irobot8
    One of the reasons to invest in a property to live in is tax efficiency.

    If you are BTLing or investing a £300k pot, your income from it is taxable. When you are investing in the house you live in, the 'income' (rent saved) is not taxable.

    When you sell a BTL flat or an investment fund for more than you paid for it, capital gains tax can be payable. When you sell the house you were living in, it isn't.

    In retirement you are going to need income, savings and a roof over your head. No harm in buying that roof over your head now.

    You are right that when we look back in history at the stock market, the bond market, the property market, there are always some relatively better times to buy and some less attractive times to buy. Maybe you will feel disappointed if you don't "catch the bottom" but in relative terms, few people are successful at indulging in market timing.

    So, as a long term investment it doesn't matter if you'll be paying more than the cheapest you could have ever paid - when you've kept it for 20-30 years (either what you buy now or what you exchange it for later) you will still probably look back and see that 2017 wasn't the most expensive point in all that time. And even if it was expensive in terms of headline price it might not be the most expensive in outright affordability. You can get a 10-yr fix mortgage rate at only 2.5%, lowest it's been in 300 years (and that's at 75% LTV - it's cheaper with a bigger slug of equity).

    If your wife is "cautious with money" and doesn't want to buy a speculative portfolio of shares-based investment funds, maybe she would be happier buying a home to live in, because she knows she and you ma quite possibly need a roof over your head between age now and age 100, and if you don't own it you have to keep paying landlord some profit to get it.

    That seems more sensible than a "risk 3" investment fund which is struggling to keep pace with inflation and may continue to do so.

    Then once you have your own home, you can make some further judgments on whether to keep the BTL and how much to have invested in investment funds.

    Of course if you plan to keep moving around every couple of years then buying is not always the smart move; renting gives you flexibility to chase lucrative career opportunities all over the country which can increase wealth or happiness. But that flexibility has a cost in terms of giving the landlord a rental profit and needing to make investment decisions to avoid your big pile of cash sitting idle.
    • Ifts
    • By Ifts 11th Nov 17, 9:48 PM
    • 1,754 Posts
    • 1,088 Thanks
    Ifts
    This blog post may be of interest to you:

    Buy to let vs Stocks & Shares ISA: why the pendulum has swung

    https://www.share.com/blog/2017/february/buy-to-let-vs-stocks-shares-isa-why-the-pendulum-has-swung/
    Never let the perfume of the premium overpower the odour of the risk
    • irobot8
    • By irobot8 12th Nov 17, 11:12 AM
    • 22 Posts
    • 3 Thanks
    irobot8
    This blog post may be of interest to you:

    Buy to let vs Stocks & Shares ISA: why the pendulum has swung

    https://www.share.com/blog/2017/february/buy-to-let-vs-stocks-shares-isa-why-the-pendulum-has-swung/
    Originally posted by Ifts

    Very useful, thanks Ifts. However, leaving aside CGT, I think the article suggests the recent tax changes swing the pendulum towards equity investing versus leveraged BTL. We own the BTL outright, so do not have a mortgage, and wouldn't plan to build a BTL portfolio through leverage. As such, I believe the tax changes would not affect us - so maybe the pendulum wouldn't swing at all :-) However, let me know if I interpreted something wrong there!
    • irobot8
    • By irobot8 12th Nov 17, 12:02 PM
    • 22 Posts
    • 3 Thanks
    irobot8
    Many thanks for taking the time to write this bowlhead99!


    One of the reasons to invest in a property to live in is tax efficiency.

    If you are BTLing or investing a £300k pot, your income from it is taxable. When you are investing in the house you live in, the 'income' (rent saved) is not taxable.

    When you sell a BTL flat or an investment fund for more than you paid for it, capital gains tax can be payable. When you sell the house you were living in, it isn't.

    In retirement you are going to need income, savings and a roof over your head. No harm in buying that roof over your head now.
    Originally posted by bowlhead99

    Agree with all of that! After all the feedback here, and going on instinct, I'm definitely going to push for buying somewhere to live :-)

    You are right that when we look back in history at the stock market, the bond market, the property market, there are always some relatively better times to buy and some less attractive times to buy. Maybe you will feel disappointed if you don't "catch the bottom" but in relative terms, few people are successful at indulging in market timing.

    So, as a long term investment it doesn't matter if you'll be paying more than the cheapest you could have ever paid - when you've kept it for 20-30 years (either what you buy now or what you exchange it for later) you will still probably look back and see that 2017 wasn't the most expensive point in all that time. And even if it was expensive in terms of headline price it might not be the most expensive in outright affordability. You can get a 10-yr fix mortgage rate at only 2.5%, lowest it's been in 300 years (and that's at 75% LTV - it's cheaper with a bigger slug of equity).
    Originally posted by bowlhead99


    Again, agreed! I don't believe in there being a "right time to buy". We'd only need a small mortgage, and as you mention, it would be at historically low rates.


    If your wife is "cautious with money" and doesn't want to buy a speculative portfolio of shares-based investment funds, maybe she would be happier buying a home to live in, because she knows she and you ma quite possibly need a roof over your head between age now and age 100, and if you don't own it you have to keep paying landlord some profit to get it.

    That seems more sensible than a "risk 3" investment fund which is struggling to keep pace with inflation and may continue to do so.
    Originally posted by bowlhead99

    Rather than being cautious with money, my o/h is simply not interested. At a basic level, to avoid any change - and because she likes the house we're currently renting - it would actually be harder to sell the idea of buying a house and moving once again.

    Then once you have your own home, you can make some further judgments on whether to keep the BTL and how much to have invested in investment funds.
    Originally posted by bowlhead99

    Before that stage, the critical thing for us now is to decide whether to cash in the "risk 3" investment fund, or otherwise sell the BTL - in order to buy a home.


    From your post, you seem to be suggesting it would be better to cash in the investment fund. Although this would avoid the time required to sell the BTL (allowing us to move quicker with a purchase) - if we eventually decided to sell the BTL, we'd incur an extra 3% SDLT which we would likely not be able to reclaim. Also, we've spent a couple of years squirreling the max allowance into Stocks and Shares ISAs (in the same underlying portfolio mix as the investment fund) - and we'd lose the tax advantages of this, essentially having to start again. Finally, there would be a period of time where all our money would be in property - so a bit risky I guess!


    Is there any specific reason you'd tend to get rid of the fund and keep the BTL as a first stage?
    • BananaRepublic
    • By BananaRepublic 12th Nov 17, 5:52 PM
    • 871 Posts
    • 623 Thanks
    BananaRepublic
    Buying your own home is always a good idea, assuming there are no good reasons not to such as living temporarily in an area. There is no Capital Gains Tax on the sale and no additional stamp duty. And there are other advantages, such as being able to do whatever you like to the house. Plus you are not paying a large sum of money to someone else each month.

    In my experience people tend to regard stocks and shares as risky, and a no no, even though they probably have pensions invested in stock markets. Try to get your wife, and yourself, to read a decent investment book. She needs to learn that risk can be managed in such a way as to get good returns in the long run. Once you understand the basics, you start to feel more comfortable with risk. It means learning the common mistakes such as buying on a high, and selling on a low when everyone is panicking and saying not to buy shares.

    As to BTL, were large numbers of European immigrants to leave, we could well see significant drops in property prices. And higher vacancy levels in BTL meaning the risk of no income for long periods.
    • bowlhead99
    • By bowlhead99 13th Nov 17, 2:21 AM
    • 6,897 Posts
    • 12,410 Thanks
    bowlhead99

    Rather than being cautious with money, my o/h is simply not interested. At a basic level, to avoid any change - and because she likes the house we're currently renting - it would actually be harder to sell the idea of buying a house and moving once again.
    Originally posted by irobot8
    Tell her it's selfish to have a £300k pile of money that would equate to fifteen years net salary for many households in the UK, and then be so lazy that you can't be arzed doing anything with it other than leave it in a low risk low return fund that will just be treading water in real terms, meanwhile paying your landlord a weekly profit which you could eliminate simply by buying a place of your own if you could be bothered with the one off hassle of moving to a different building.

    Half the people in the country would kill to have a "problem" like that of how to make best use of that sort of money, yet her solution is:

    "yeah, I can't be bothered using it for anything or investing it to grow my wealth significantly for retirement, so I'll just see an FA and say I only want to put in to very low risk solutions for the foreseeable future, in case I want to get off my bum and do something with it, but realistically I don't. I'll just keep spending our salaries on buying our landlord a house, and resign us to working into old age rather than trying to buy a place to live in our retirement or increasing our wealth via funds which could grow in real terms and let us retire early."

    Not the smartest use of funds IMHO.

    Before that stage, the critical thing for us now is to decide whether to cash in the "risk 3" investment fund, or otherwise sell the BTL - in order to buy a home.
    . If the choice of what to sell off is binary one or the other, and she is a cautious/ inexperienced investor who doesn't want much risk, I would sell the BTL because a set of investment funds can provide much more diversified investment than a single BTL - and be also be spread across ISA and pension tax wrappers.
    From your post, you seem to be suggesting it would be better to cash in the investment fund. Although this would avoid the time required to sell the BTL (allowing us to move quicker with a purchase) - if we eventually decided to sell the BTL, we'd incur an extra 3% SDLT which we would likely not be able to reclaim. Also, we've spent a couple of years squirreling the max allowance into Stocks and Shares ISAs (in the same underlying portfolio mix as the investment fund) - and we'd lose the tax advantages of this, essentially having to start again. Finally, there would be a period of time where all our money would be in property - so a bit risky I guess!

    Is there any specific reason you'd tend to get rid of the fund and keep the BTL as a first stage?
    I would probably sell the BTL because once you have a new property you live in you will have significant exposure to the UK property market (not that you would be planning to cash in your new home any time soon); from a diversification perspective, a property to live in and one residential BTL and no broad investment funds is not as good a portfolio as a property to live in and no BTL and a large amount of investment funds investing across asset classes.

    However, I have no idea where you live and how much your ideal property (or one "good enough" for next 5-10 years) would cost and what your household income and outgoings are.

    First step is to know that you could use some of the 300k and your salaries that you are currently spending on rent to support a mortgaged purchase of something to live in. £100k of the money that's currently in investment funds, together with a 65-75% LTV residential mortgage would give you a £300-400k home -perhaps on 5-10 year fixed rate allowing overpayments of 10% (30-40k) a year if the mood took you.

    That would be leaving you with your unmortgaged BTL and £200k of investment funds. I would agree with others that those investment funds should be a notch or two higher up the risk scale for better long term growth.

    So, you could get your own home to live in without selling the BTL. However if you do that you'll pay an extra 3% premium stamp duty for buying a second property (£10-12k). You could avoid that by selling the BTL and holding off on buying your home until you complete the sale.

    I would probably be selling the BTL to provide cash to boost the investment funds and also to partially reduce the mortgage requirement on the home (though no real need to get the residential mortgage down to the absolute lowest amount possible, as mortgage finance is very cheap at the moment and fixed rates are decent). Alternatively if you like the risks of BTL and don't mind the stamp duty premium you could take a part mortgage on the BTL and keep it, having freed up some cash to do other things - such as more equity in your home or more investment funds. If you owe mortgage interest on the BTL you'll get 20% tax relief on it (which is good as a basic rate taxpayer, though not as good for a higher rate taxpayer who pays 40% on the associated rental income).

    There is no need to do any of this right now, but you could set yourself a target of doing it once your current tenant's tenancy expires (if you intend to sell rather than mortgage the BTL). Meanwhile if you are going to use up some of the investment funds as part of the home-buying project then it's fine to keep a bit more than that amount in 'risk 3' funds but the balance - which you don't need for a longer term or perhaps even retirement - could probably go a notch or two up the risk scale for better growth potential.
    Last edited by bowlhead99; 13-11-2017 at 2:25 AM.
    • MichelleUK
    • By MichelleUK 13th Nov 17, 11:37 AM
    • 323 Posts
    • 199 Thanks
    MichelleUK
    Re: low cost, the initial one-off charge to the IFA for our Collective Investment account was 2% of the amount invested. Ongoing monthly service charges are just over 1% p.a.


    The portfolio is "...a mix of actively managed and passive funds in different weightings to control the overall cost of the portfolio". Currently, equity (mostly international) is at 38%, fixed interest (mostly UK Bonds) 32%, cash 27% and property 3%. That mix probably differs from yours in that the risk level is at 3 out of 10.


    Would that fit your definition of low-cost, or have you opted for something stripped down like a 100% passive tracker?
    Originally posted by irobot8
    So you have £300k in a portfolio being managed at just over 1%, with 27% in cash?

    Maybe ask your wife if she would consider going to her local Building Society, giving them £81,000 and saying, "forget paying me any interest, I shall pay YOU £810 per year to keep it for me!"

    Hmmmm...I'm guessing she would not be too keen!
    • kidmugsy
    • By kidmugsy 13th Nov 17, 2:11 PM
    • 9,851 Posts
    • 6,644 Thanks
    kidmugsy
    It seems strange to me that you own a BTL outright yet you are renting yourselves.
    Originally posted by Audaxer
    Strange? It's potty in general. Of course it might be logical in the particular circs of the couple.

    Dear OP, the tax deal on owner-occupied housing is ludicrously good. Selling your BTL and buying yourselves a house is likely to prove a good move.

    As for your investment portfolio: in your shoes I'd keep the conservative element in high-interest current accounts, regular savers, and premium bonds. The risk element I'd keep in a global spread of equities, in the form of one or more low cost "trackers". If I had some good way of storing them I'd also bung £20k or so into gold sovereigns.
    Free the dunston one next time too.
    • irobot8
    • By irobot8 13th Nov 17, 4:46 PM
    • 22 Posts
    • 3 Thanks
    irobot8
    First step is to know that you could use some of the 300k and your salaries that you are currently spending on rent to support a mortgaged purchase of something to live in. £100k of the money that's currently in investment funds, together with a 65-75% LTV residential mortgage would give you a £300-400k home -perhaps on 5-10 year fixed rate allowing overpayments of 10% (30-40k) a year if the mood took you.

    ...

    So, you could get your own home to live in without selling the BTL. However if you do that you'll pay an extra 3% premium stamp duty for buying a second property (£10-12k). You could avoid that by selling the BTL and holding off on buying your home until you complete the sale.
    Originally posted by bowlhead99


    It's a good point, and I'm now thinking to leave the portion of the investment fund that's squirreled into ISAs alone (to retain its tax-efficient status), and use the remaining £230K of the fund + £100K mortgage to purchase a home (we're in the South-East!).


    Re: the extra 3% premium stamp duty for buying a second property, I believe this would be around £9-10K. To be honest, given the time it's taken us to sell properties in the past, I reckon we'd lose 3-4K in rent from the BTL (as realistically, we'd need to vacate it first) - in addition to paying a similar amount in rent ourselves - if we waited for the BTL to be sold. Using the investment fund would get us out of this pickle a lot quicker, and at not much extra cost. I'm aware the market has been described as unstable/stagnant, but moving quicker could also save us a fair bit of money if prices are rising (albeit slowly).

    I would probably be selling the BTL to provide cash to boost the investment funds and also to partially reduce the mortgage requirement on the home (though no real need to get the residential mortgage down to the absolute lowest amount possible, as mortgage finance is very cheap at the moment and fixed rates are decent).
    Originally posted by bowlhead99

    We don't have large salaries/income, so keeping any mortgage payments as low as possible would be necessary.


    If we did use £230K of the investment fund to buy a home, my idea would be to eventually sell the BTL - although as soon as possible. With this plan, most of our assets would be in UK property until the BTL was sold (however brief that period is). Would you see this as too much of a risk, or do you think it would be worth taking the risk to move quickly on buying a home? (and eliminating our own monthly rent)

    There is no need to do any of this right now, but you could set yourself a target of doing it once your current tenant's tenancy expires (if you intend to sell rather than mortgage the BTL).
    Originally posted by bowlhead99

    The current tenants are on a periodic tenancy (the initial 6-month tenancy agreement ended over a year ago). Our tenancy is similarly periodic. As such, there's nothing to stop us taking action now in theory.
    • bowlhead99
    • By bowlhead99 13th Nov 17, 5:56 PM
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    • 12,410 Thanks
    bowlhead99

    Re: the extra 3% premium stamp duty for buying a second property, I believe this would be around £9-10K. To be honest, given the time it's taken us to sell properties in the past, I reckon we'd lose 3-4K in rent from the BTL (as realistically, we'd need to vacate it first) - in addition to paying a similar amount in rent ourselves - if we waited for the BTL to be sold. Using the investment fund would get us out of this pickle a lot quicker, and at not much extra cost.
    Originally posted by irobot8
    Not a great deal extra cost but £10k is not to be sniffed at. You can think of it as putting the purchase price of your new place up by 3% (at current rates, that saving's equivalent to covering over three years' mortgage interest cost on your new £100k mortgage!), or you can think of it as lowering the sale price of the old BTL by that £10k. Actually it's worse than getting £10k less in sales proceeds from the old place because at least if you got a lower sale price you would save CGT, or if you missed £10k of rent income you would save income tax on not earning it.

    Just because you have suddenly discovered that you could improve your overall financial situation, that doesn't mean you have to implement your plan literally this week. Relax and take some time to think it over. Relatively few purchase transactions complete over December and (generalising) there is usually more to choose from in spring. No harm in looking around of course - there is also a bit more competition if there's extra buyers and sellers in the market so if your perfect property appears tomorrow maybe you could get a bargain if the seller is desperate to cash out.

    [Quote,]
    I'm aware the market has been described as unstable/stagnant, but moving quicker could also save us a fair bit of money if prices are rising (albeit slowly).[/quote]
    Seems reasonable, hanging around to next year *could* cost more for the new place, if prices rise, which they may not - they might fall instead. You might or might not get more for the old one if you have flexibility to wait even longer than next spring. But if the plan is to exit the BTL (rather than mortgage it to free up some funds) then you will be looking at both buying and selling so if things go up a bit, one price change will go some way to offset the other.

    If we did use £230K of the investment fund to buy a home, my idea would be to eventually sell the BTL - although as soon as possible. With this plan, most of our assets would be in UK property until the BTL was sold (however brief that period is). Would you see this as too much of a risk, or do you think it would be worth taking the risk to move quickly on buying a home? (and eliminating our own monthly rent)
    If you are perhaps already too 'exposed' to UK property price through your BTL asset then jacking in lots of your funds to buy another £300k-worth of home before selling the first one seems perhaps a bit excessive, especially if there's a SDLT penalty. I would put the wheels in motion to sell the BTL in a few months time and then do the buying thereafter.
    The current tenants are on a periodic tenancy (the initial 6-month tenancy agreement ended over a year ago). Our tenancy is similarly periodic. As such, there's nothing to stop us taking action now in theory.
    As there is no urgency to actually buy a new home tomorrow, and a new home is just a goal you're generally working towards -not something that you have to implement tomorrow just because you got the idea to do it today - you could maybe give the tenant a generous notice period to end of the Feb rent period rather than the two month bare minimum, with aim of buying somewhere to complete in first half of next year. Knowing they have to move out the best future they might decide to exercise their own right to give you a month's notice within that period, but are unlikely to want to do that now and move over Christmas ; and if they move out in the new year that's fine as you can start marketing it more easily, safe in the knowledge that they won't stay put and need to be evicted scuppering an easy sale.

    So personally:
    Plan to exit the BTL.

    Line up a new home to complete after the exit to avoid overlap of property assets, high SDLT, and needing to temporarily sell off loads of funds that you could really afford to keep in the long run.

    If something absolutely awesome comes up in next couple of month that's already vacant/ no chain then perhaps be willing to cash in some investments (the non ISAd ones) to do it and take the heavy stamp duty hit while waiting to exit the BTL place. Also once your tenant is out, if you begrudge paying rent while waiting to buy, you could always save a bit of your own rent cost by moving back into the BTL temporarily while waiting for it to sell, and just put up with an annoying commute. But really being on a rolling 1mth statutory periodic tenancy for your own accommodation as you are now, gives plenty of flexibility to move out when you need to without being homeless, so probably no need if no CGT benefit in doing so.

    Meanwhile 'upgrade' the risk level on the investment funds that you definitely don't need for the property shenanigans.
    • irobot8
    • By irobot8 16th Nov 17, 8:38 PM
    • 22 Posts
    • 3 Thanks
    irobot8
    All great advice. Thanks again for all your help bowlhead99!
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