Property or Stocks? Can't Decide!

mrsweep

quotememiserable wrote: »

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.

If I repaid the mortgage the 3.5% would be my net return on the current value of the property after all overheads and fees. I worked out the net cash before tax because that seems like-for-like to compare to the return from equities which have no overheads. It may be low, but the property is in a desirable location and rental yields are not high, but the capital appreciation longterm historically is good (4.9% conservatively over 10-30 years).

Answering some previous points, I mentioned in my first post that I have made maximum contributions to my pension and ISA, so this cash will be invested outside the tax advantage wrapper of either, also both existing investments are invested in various funds not just the UK FTSE.

Property seems the lower risk option, prices can go down, but if they do fall 20% or 30% it doesn't happen in days or weeks as can happen with equities. Also, adding the 3.5% return per annum and the 4.9% capital appreciation, seems to put property slightly ahead of equities which return 6-7% annually (longterm average).

But I am wondering if it is a bad investment decision to repay the mortgage on the Buy-to-Let because when investment classes are discussed it is normally suggested that nothing out-performs equities in the long run. So have I missed something?

innovate

mrsweep wrote: »

So have I missed something?

How old are you? [How many years to retirement?]

Do you expect any significant changes in your income at some stage?

jimjames

mrsweep wrote: »

Property seems the lower risk option, prices can go down, but if they do fall 20% or 30% it doesn't happen in days or weeks as can happen with equities. Also, adding the 3.5% return per annum and the 4.9% capital appreciation, seems to put property slightly ahead of equities which return 6-7% annually (longterm average).

But I am wondering if it is a bad investment decision to repay the mortgage on the Buy-to-Let because when investment classes are discussed it is normally suggested that nothing out-performs equities in the long run. So have I missed something?

I wouldn't say property is the lower risk option, there are all sorts of risk levels for investments.

One big difference is that you can't easily sell a BTL. If prices start dropping you may have to wait some time, possibly even years to get money back unless you slash the price. With shares or funds you can sell and have the money in your bank within days.

atush

the correct way to base your yield is on what the property cost you, not its current value.

quotememiserable

atush wrote: »

the correct way to base your yield is on what the property cost you, not its current value.

correct, that's just the point I was heading for.

mrsweep

innovate wrote: »

How old are you? [How many years to retirement?]

Do you expect any significant changes in your income at some stage?

8 years to retirement, which is also when my income will change.

mrsweep

atush wrote: »

the correct way to base your yield is on what the property cost you, not its current value.

Yes I suppose it is! By that measure the BTL is generating about 6%.

However my reason for calculating my returns as net income after all costs, as a percentage of the total value, is because I am interested in working out which option is likely to generate me the best return long-term. The logic being, if I paid off the mortgage, I have an asset worth X that can return 3.5% net income p.a. (rent) and potential capital appreciation of 4.9%. So my asset can yield a total return of around 8.4% p.a. Hypothetically (I am not considering this) I could sell the property, and put the cash into equities if they were likely to perform better than averaging 8.4% p.a. return long-term.

Anyway, that's why I was using the return on equity rather than purchase price.

Which still leaves me unsure whether I should pay off the mortgage with the cash I have, or put the cash into equities...

atush

Given the mtg interest is a deductible against the income, you'd be better off leaving it.

quotememiserable

mrsweep wrote: »

Yes I suppose it is! By that measure the BTL is generating about 6%.

How long have you had it? This suggests that either value has gone up a lot above rpi, or your rent has fallen behind. Could you get more if you terminated and re-let at market rates?

mrsweep

atush wrote: »

Given the mtg interest is a deductible against the income, you'd be better off leaving it.

I had thought about that, and that was one of the ticks in the 'put the cash into equities' column.

Against this was a tick in the 'pay off the mortgage' column because it becomes a safe asset. If equities crashed and don't recover for years then I won't have the money to pay off the mortgage later when I do retire.