Is BTL now the best retirement investment?

HAMISH_MCTAVISH

Procrastinator333 wrote: »

Oh, and the best retirement investment by an absolute mile is matched contributions from your employer.

Yes, I think I mentioned that in my first post in the thread.

Free money. The best kind. :beer:

gallygirl

4 BTL's here and 12 years history. I mitigate risk by having more cheaper properties therefore less likely to have 100% voids, which would be the case if I had one expensive house. Over the years we've had a total of eleven months voids (two properties have original tenants in), six months of voids were in two previous btl properties I decorated and sold) . We let unfurnished, which is easier to handle and right for what we are providing - 'council house' housing for people who realistically will never be able to buy, but want their own, nice things around them.

All mortgages are capital repayment. Rates vary from 1.49 to 4.99. No arrangement fees ever paid, we are lucky they are mainly decent variable rates so haven't needed to fix. One is a remortgage on our residential mortgage, which tax man ok with as long as we kept a clear trail of paying off original btl mortgage with remortgage. Because we have mortgages (& capital repayment ones) the annual profit is not great, but all ploughed into residential offset.

Have I been 'lucky' with my btl's? Yes and no. I chose to put myself in this position where I used my money to buy btl's. Any money I have made is not luck - I chose this instead of wardrobes full of clothes, expensive night outs etc, as the friend who thinks I'm 'lucky' has chosen. I have mainly had good tenants which is down to an element of luck, as well as research & gut instinct. I've only bought local properties & not speculated on fancy off-plan flats etc (still kicking myself we didn't buy in Ashford 8 years ago though :doh:)

All repairs are done by a team of workmen I have amassed over the years. I trust them to get on with it & not overcharge me. Insurance takes around 1/2 hour a year per property to sort out (1/2 of which is spent looking on quidco for cashback :rotfl:). Accounts are kept up to date.

When I retire (early) I don't intend to keep the properties as we will be moving overseas part of the year & I've seen from friends how stressful voids/non-paying tenants etc are when you are not on hand. I will sell over time and keep the cash to live on (and investing that will give me more stress than the btl's probably:rotfl: ). Decisions re CGT will be made later, but so far the thinking is one property will be retained for our UK base, but as that is easiest to let out we will keep it tenanted till last. We may live in the others one at a time for a year or so while we do up, one in particular is ripe for renovation. Although planning to retire early we will still want to be active & I've long had plans for these houses.

BTW I also pay £600 a month into my mortgage, which is mainly in a SIPP. The 40% is too good to ignore, however I sweat more over that, and probably spend longer looking after it, than I do over properties. Mr GG also pays a lot into his pension.

The way we see it we have flexibility with the capital in the btl's which we don't have in our pensions. That is the biggest attraction for us.

Procrastinator333

HAMISH_MCTAVISH wrote: »

Minus fees and the vagaries of the market....

In reality most pensions are performing nowhere near this well.... It's a bit of a national scandal IMO, but it's sadly the case.

After fees, the return from your example would be more like half what you estimate.

http://www.independent.co.uk/money/pensions/revealed-the-scandal-of-how-pension-providers-rake-in-the-money-2157940.html

Which puts the BTL markedly ahead again I'm afraid.

Pensions are just a wrapper, so to say pensions are not performing is simply not true. You can put in almost anything you like and you can select investments with lower fees if you shop around. If you are locked in with your employer, they tend to have negotiated lower fees. So to be honest, anyone without the intelligence to generate above 4% after fees including inflation on their pension is probably not going to be the best candidate for starting a business of their own and going in to BTL.

By intelligence I'm not referring to doing all of the picking themselves. That is not for most. But having the intelligence to spend a small amount of cash on getting advice from an IFA. A bit of guidance on avoiding high fee options or addressing the asset profile will easily generate double or triple the 4% in the long run.

So in your case, I take it you take employers matched contributions. Do you put anything beyond that in to a pension? Or do you invest everything beyond that in to BTL?

dunstonh

HAMISH_MCTAVISH wrote: »

Minus fees and the vagaries of the market....

In reality most pensions are performing nowhere near this well.... It's a bit of a national scandal IMO, but it's sadly the case.

After fees, the return from your example would be more like half what you estimate.

http://www.independent.co.uk/money/pensions/revealed-the-scandal-of-how-pension-providers-rake-in-the-money-2157940.html

Which puts the BTL markedly ahead again I'm afraid.

The average balanced managed fund (which is a very simple investment fund for the lazy) trends towards 7-8% p.a. after charges over the long term. In the last decade, which is recognised as a poor time for investments, they have averaged over 5.5% p.a.

As for that article, the data it used was flawed. For example, since 2001, the charges benchmark for pension funds was 1% TER. I frequently arrange pensions with TERs under 0.25%. Yet that article used a hypothetical figure of 1.5%. The research company didn't use real pensions. They just made up the figure. At the end of the article, they use an ISA as an example and the fund they use has a TER over 1.5%. So, a made up figure of 1.5% TER on pensions is bad but on ISAs its fine?

Its reporting at its very worst as it plays to those that don't understand and don't want to understand. It lets people who are ignorant remain ignorant so they can keep they anti "enter-whatever-subject-the-paper-is-picking-on-this-week" stance.

BTW, the research from Holland & Denmark was flawed as in one case they only looked at the fund charge and not the provider and wrapper charge that went with it. i.e. a bit like buying a car but finding it delivered in kit form with no glass, tyres and a whole load of other things and then comparing that with a car that is ready to drive away. The other case is a hybrid scheme using institutional investment funds. Those same types of funds exist over here at the same costs. They basically took a really cheap company scheme over there and compared it with an individual retail scheme over here using a made up charge which was 50% higher than the 2001 benchmark and 750% higher than the cheapest ones over here. How is that accurate reporting?

HAMISH_MCTAVISH

Procrastinator333 wrote: »

After that, as you have factored inflation in to your example, assume they achieve 8% Per year. After 25 years they will have £276k. A BR taxpayer would have £207k.

I allowed for HPI only at 3%, instead of the long term average of inflation PLUS 2.9%, because I'm deliberately trying not to skew the figures upwards.

Likewise I only allowed for rent inflation of 3%, despite the probability rents will increase by significantly more than inflation over the next 25 years given the housing shortage and increasing population.

If you want to assume 8% from pensions, feel free, but then I should probably rework the calculation using the historical increases in rent and HPI, instead of a deliberately lower figure to be conservative.

Re pensions in general, yes, we have pensions through work, yes it's a managed plan, and yes the companies contribute as well. Be daft not to get "free money" and take advantage of the tax benefits, so we contribute the required amount to get the maximum company co-pay.

But I don't count on our pensions for retirement, and I don't trust them to be there, or be worth what they claim they'll be. Seen too many previous generations get screwed over by moving the goalposts, or plans failing to deliver.

If they do well, then great, it's gravy on top. But I plan to have my retirement covered in other ways than pensions, mostly property and some other investments and savings.

I know exactly how much I need in todays money to retire on comfortably (not including pensions). I'm ahead of my target to achieve that by the time I retire, so that'll do me.

Procrastinator333

HAMISH_MCTAVISH wrote: »

I allowed for HPI only at 3%, instead of the long term average of inflation PLUS 2.9%, because I'm deliberately trying not to skew the figures upwards.

Likewise I only allowed for rent inflation of 3%, despite the probability rents will increase by significantly more than inflation over the next 25 years given the housing shortage and increasing population.

If you want to assume 8% from pensions, feel free, but then I should probably rework the calculation using the historical increases in rent and HPI, instead of a deliberately lower figure to be conservative.

Re pensions in general, yes, we have pensions through work, yes it's a managed plan, and yes the companies contribute as well. Be daft not to get "free money" and take advantage of the tax benefits, so we contribute the required amount to get the maximum company co-pay.

But I don't count on our pensions for retirement, and I don't trust them to be there, or be worth what they claim they'll be. Seen too many previous generations get screwed over by moving the goalposts, or plans failing to deliver.

If they do well, then great, it's gravy on top. But I plan to have my retirement covered in other ways than pensions, mostly property and some other investments and savings.

I know exactly how much I need in todays money to retire on comfortably (not including pensions). I'm ahead of my target to achieve that by the time I retire, so that'll do me.

8% is a conservative estimated growth rate for a pension. I'm not saying BTL is not a potentially useful part of retirement planning. I reckon we might buy 1 or 2 at some point. However that is a far cry from sweeping statements such as:

HAMISH_MCTAVISH wrote: »

Which puts the BTL markedly ahead again I'm afraid.

That kind of thing is suggesting everyone should just pile straight on in to BTL as it is better than everything else. It has had a good run over the last decade, no doubt. And I think we all know you think it has another good run on the way. Fair enough.

But if you are wrong the potential downside is so great that statements like that are just dangerous. I think there is a good chance a pension will outperform BTL and even if it doesn't, there is no way as much potential for downside and zero chance for catastrophic failure of a pension. BTL is simply not a good idea for a BR taxpayer to put all their retirement eggs in one highly geared basket. Used as a portfolio of investments, it makes more sense.

The other thing with pensions is that they are evolving. You can already gain exposure to commercial property very easily. And my guess is that in the coming years you will be proved right about companies taking on residential property for investment and letting purpses. When that happens you can bet those companies will find their way in to the pension framework and you could then gain exposure to property within the tax wrapper.

dunstonh

12tonelizzie wrote: »

Can I ask if that takes inflation into account, and what 'long term' means? Thanks

No. That is your non inflation figure. I purposely chose your bog standard basic fund as that is where most inexperienced and lazy investors end up. More active investors and those using servicing IFAs with structured portfolios typically look to get a long term average of over 10% a year with a sensible risk level (more cautious investors will be less. Adventurous likely to be more but with a rollercoaster ride to go with it). of course, caveat being that investment returns are always unknown as are future property returns. Also, lazy investing tends to cost you just as a lazy landlord is likely to make less money than a professional landlord.

Long term is typically 15 years plus.

That kind of thing is suggesting everyone should just pile straight on in to BTL as it is better than everything else. It has had a good run over the last decade, no doubt. And I think we all know you think it has another good run on the way. Fair enough.

Mostly on the back of a previous property crash and funded by a credit boom that is unlikely to be repeated again in the near future. It will happen again at some point in the following decades as humans have short memories and make the same mistakes over and over. The problem with risk taking is that if it pays off for long period, people become complacent about it and forget there is a risk and risky transactions become mainstream and norm until the risks cease to pay off and then everyone asks what the heck where they thinking taking all those risks.

IveSeenTheLight

Dave101t wrote: »

you could even....save up your pennies for 20 years, buy a 2nd house outright, then rent it out with no mortgage at all, free money from the off!

Your not then capitalising on the tenants clearing the value of the property.

Additionally, your securing a property at todays prices instead of 20 years from now.

Hands up who think prices will be the same / cheaper in 20 years time?

abaxas

IveSeenTheLight wrote: »

Your not then capitalising on the tenants clearing the value of the property.

Additionally, your securing a property at todays prices instead of 20 years from now.

Hands up who think prices will be the same / cheaper in 20 years time?

I'll say both.

Up in GBP value.
Down relative to other currencies.

So you've made a fortune but also a huge loss.

HAMISH_MCTAVISH

Procrastinator333 wrote: »

8% is a conservative estimated growth rate for a pension.

Not according to this article.....

four years of negative returns over the past decade mean that the real returns during the period have averaged only 1.7% a year, well below the long-term average real return of 4.3% a year over the past half century.”

http://www.pensionfundsonline.co.uk/articles/growthnews.aspx

Average real return for last decade is just 1.7%.

Average real return for last 50 years is just 4.3%.

Anyway.... Back to BTL.

But if you are wrong the potential downside is so great that statements like that are just dangerous. I think there is a good chance a pension will outperform BTL and even if it doesn't, there is no way as much potential for downside

I disagree. I think there's virtually no chance a pension will outperform a BTL in the next 25 years.

To me, a house will always have intrinsic value, pension funds can and have been wiped out.

And the very worst case scenario with BTL is that someone buys you a free house, that turns out to not be worth as much as you'd hoped, or that it took longer than you hoped for them to buy it for you.

zero chance for catastrophic failure of a pension.

:rotfl:

Try telling that to the million pension holders who lost their dream retirement when Equitable Life went bust in 2000.... Even after government compensation (which is still not resolved a decade later) they'll lose up to half of their lifetime pension savings.

http://www.telegraph.co.uk/finance/6568895/Equitable-Life-scandal-Honor-Blackman-vents-anger-over-4-billion-compensation-delays.html

And with 15 policy holders a day dying, no wonder the government took so long to sort it out.....

Pension funds have a long and glorious history of catastrophic failure, mismanagement, failing to deliver expected or promised returns, failing to safeguard customers funds, mis-selling products, etc.

http://www.telegraph.co.uk/finance/personalfinance/comment/4345714/Comment-Pity-the-Standard-Life-investors-who-thought-they-were-safe.html

Here's a list of the 5 biggest pension scandals in the last few decades, I'd bet most of their many victims wished they'd bought a second house instead.

http://www.lovemoney.com/news/savings-investments-pensions/pensions/4133/the-five-biggest-pension-scandals

BTL is simply not a good idea for a BR taxpayer to put all their retirement eggs in one highly geared basket. Used as a portfolio of investments, it makes more sense.

Agreed. Balance is good. You should have both.

And my guess is that in the coming years you will be proved right about companies taking on residential property for investment and letting purpses. When that happens you can bet those companies will find their way in to the pension framework and you could then gain exposure to property within the tax wrapper.

Also agreed.

And look, I don't mean to be unduly negative about pensions..... They do have a place, and do serve a purpose. I just don't trust them, and I know for a fact they're anything but the "safe" investment they're peddled as by snake-oil salesmen sorry, Independent Financial Advisors.

But they still have a place, everybody should have one. I just think that nobody should count on them as their sole source of retirement income. Far too risky.