Property or Stocks? Can't Decide!

mrsweep

Hello everyone, I hope this is the right place to ask this.

I have a buy-to-let and I hold stocks and shares through a tracker fund. I have made maximum contributions into my pension and PEP and I have no mortgages or loans (except the BTL mortgage).

I have saved enough to pay off the mortgage on the BTL. Until now I have not repaid the mortgage because the interest rate is relatively low for a BTL at 4.9% and this is a tax allowable expense. I have calculated that after all costs, mortgage, maintenance, wear and tear etc I get 2.6% income per year on the equity in the property (my initial investment). If I repay the mortgage the rental income would return 3.5% pa on the full value of the property.

I have checked house price indexes over 4, 10, and 30 years for the area and the lowest of these is an average annual increase of 4.9%.

If I factor in the rental income + the property value increase I get 7.5% with mortgage, 8.4% without mortgage.

From what research I have done I think the longterm average annualized return for the FTSE is about 6-7% dividends reinvested.

Thank you for reading so far! I would like to know what people here would do in my position and why:

1. Use the cash to repay the mortgage on the BTL now. It will give a disposable income of 3.5% income before tax. The property appreciation adds another 4.9% but cannot be realized unless sold.

2. Use the cash to put down the deposit on another BTL of a similar type and returns.

3. Use the cash to invest in a FTSE tracker to buy and hold, with dividends reinvested. If income is needed take 3.5% from the fund per annum and leave any extra gains invested.

All the above is before tax or Capital Gains Tax as both would apply equally to any gains or income I received from either investment.

What would you do?

bigadaj

The Board is generally and buy to let so might need to consider this in many responses. Having said that this is often because the people suggesting going into it have no experience and have done no research.

It sounds as though you're happy with the buy to let and are doing well with it. In that case the investing in another property makes some sense, providing you find the right place at the right price. Paying off the mortgage on your current btl reduces risk in some ways but is tax inefficient and effectively gives a poor return for the reasons you've given.

More equities could be good but this depends on your current holdings, putting this into a ftse tracker isn't balanced, so if you want this then maybe look at global funds, vanguard lifestyle trackers etc. outside an isa you will be subject to tax on dividends on this however.

Probably best to look at the totality of your investments and determine current allocation and consider this against your risk tolerance and aims.

Assuming that you go for another buy to let then capital gains would be a possible concern down the line, which is easier to manage with investments.

I'm personally bearish on property as the government must be running out of tricks so to sustain their current elevated levels but who knows.

mrsweep

My figures suggest the upside potential and downside risks for property are not significantly different from equities.

This said, the reason I posted is that I cannot make up my mind, because whenever equities are discussed in terms of investment, the point is normally made that no other investment asset type out-performs equities in the long run. My figures comparing my two options suggest it is not so clear cut.

opinions4u

A bit of both?

Just avoid an all eggs in one basket (or one property) approach.

Radiantsoul

The risk profile is different between shares and housing.
Shares are far more liquid(you can buy and sell shares in seconds and in small parts for the price of a few pints), you can access a diversifed portfolio(via trackers) and they don't ring you up to say the boiler is broken.

opinions4u

Radiantsoul wrote: »

they don't ring you up to say the boiler is broken.

But beware any calls from the boiler room!

racing_blue

There's a hideous old boiler in my house. But she'll be going out to work later.

badger09

racing_blue wrote: »

There's a hideous old boiler in my house. But she'll be going out to work later.

Hope she's not on MSE :eek::eek::eek:

atush

You have stocks and shares on ONE tracker fund?

If so, one property and one tracker do not a balanced portfolio make. I'd invest your spare cash into more trackers/funds than just one. And not into another FTSE one of that is where the last tracker is. There are other markets out there than the UK. There are also other asset classes from Bonds to Commodities, to Commercial property.

If you want just one new fund, you could look at one of the Vantage ones, maybe the 60/40 ones as you don't seem to have bond exposure (although you haven't mentioned what your pension is invested in?)

innovate

I suppose the decision should also take into account how old you are and whether you expect any significant changes in your income at some stage.

Also, is that tracker fund in an S&S ISA?

quotememiserable

You say the rental income is 3.5% of the 'full value' of the property. That's very low. Are you taking the current market value rather than what you paid? Or perhaps deducting expenses from the rent before calculating the %age?
We need to get the figures on an equal footing before making comparisons.