What sort of realistic return?

kenno010

Hi guys,

I have been fortunate enough to inherit a property worth £420,000 but I am now in the process of calculating whether it would be better to rent the property out (approx £1500 per month) or to sell the house and invest the money in such a way to generate an income from it. I should add that I would want the money to be safeguarded and not put in an adventurous portfolio.

My question is all things being considered how much could you expect to earn per annum on £400,000 and would it be safer to not to sell?

Thanks in advance!

John

dividendhero

kenno010 wrote: »

.

My question is all things being considered how much could you expect to earn per annum on £400,000 and would it be safer to not to sell?

Very simplest option would be a FTSE 100 tracker such as ISF - this will yield 3.85%, ie £1,283 pcm on 400 grand. But crucially this is tax paid and you're not going to get a tenant refusing to pay rent and wait till a bailiff kicks them out..

bigadaj

dividendhero wrote: »

Very simplest option would be a FTSE 100 tracker such as ISF - this will yield 3.85%, ie £1,283 pcm on 400 grand. But crucially this is tax paid and you're not going to get a tenant refusing to pay rent and wait till a bailiff kicks them out..

That would be a poor option for total return, even if the dividend looks relatively good.

Global multi asset tracker would be better, total returns often quoted as maybe 3-4% in real terms. However markets are at highs and have produced good returns for nearly a decade now, so arguably higher risk of a correction or maybe a crash, also pound is weak and may well strengthen further, reducing returns in other currencies, primarily dollar and euro.

bostonerimus

You need to work out your costs involved in renting, taxes etc and also estimate any potential capital gains. Then you can work out the net income as a percentage of the house's value. The capital gain will depend on "location, location, location" (so maybe ask Kirstie and Phil).

FYI I've owned an income property in a US college town for about 20 years and get 6% income after taxes and expenses and have seen 5% annual capital gains. Over the same period I've had a roughly 60/40 equity to bond portfolio and it has returned 8.5% a year. Of course future investment returns are not knowable and the performance of your rental might be very different, you need to do the sums.

dunstonh

and not put in an adventurous portfolio.

Just highlighting that as it seems to have been missed bythe responses.

should add that I would want the money to be safeguarded

This bit also needs explaining as safeguarding could mean very different things to different people.

My question is all things being considered how much could you expect to earn per annum on £400,000 and would it be safer to not to sell?

Cant be answered on the limited info supplied.

kenno010

Thanks guys, much appreciated.

Sorry Dunston having read that back I appreciate I have been a little vague.

By 'safeguarding' I mean that the money is safe (as it can be) whether this be by the FSCS or similar body, not being risked or in a super cautious portfolio.

I am trying to calculate whether the money could earn the same or potentially more than the property being rented out, taking everything that comes with letting a house into consideration. As Boston mentioned the capital gain is also something to be considered in favor of keeping the property.

John

jimjames

You don't seem to be comparing like with like.

You are looking at the income from a single property (high risk) and then excluding any options to compare that have any risk at all. Maybe I've misunderstood as there do seem to be some quotes that are at odds with each other. (initially adventurous portfolio, now not a super cautious one)

You can get capital gains with shares and with property. You also have options for shares or funds that are tax free. You don't get that with property. It's also worth bearing in mind that if you invest you don't need to put everything into the same thing so you can balance risk.

Drp8713

I think you need to read up on risk, or get an IFA involved.

Holding a single property is high risk and tax inefficient. House price crashes, void periods, damage and no protection from income or capital gains tax. I would sell the house and invest elsewhere.

Then you talk of the FSCS, that means deposit accounts. NS&I can protect the whole £400k, but only offer 0.75% interest, inflation is 2.9% that means on £400k you will be losing £8600 each year to inflation. Another bad option.

A diversified portfolio of shares, bonds and property gradually moved into ISAs and Pensions is by far the best choice. I consider it much lower risk than a single property or the whole lot in cash.

Wookey

Is the property you have inherited something you could/would consider moving into? If it is a sale that you end up going for might it be easier to sell your current house and move into the inherited one?

bostonerimus

Drp8713 wrote: »

I think you need to read up on risk, or get an IFA involved.

Holding a single property is high risk and tax inefficient. House price crashes, void periods, damage and no protection from income or capital gains tax. I would sell the house and invest elsewhere.

Then you talk of the FSCS, that means deposit accounts. NS&I can protect the whole £400k, but only offer 0.75% interest, inflation is 2.9% that means on £400k you will be losing £8600 each year to inflation. Another bad option.

A diversified portfolio of shares, bonds and property gradually moved into ISAs and Pensions is by far the best choice. I consider it much lower risk than a single property or the whole lot in cash.

The OP needs to run the numbers, The house might work out nicely.....then again there might be issues. A rental and an investment portfolio can be complimentary and there are ways to mitigate the potential tax issues.

jimjames

Drp8713 wrote: »

Then you talk of the FSCS, that means deposit accounts.

FSCS protect investments too but in a different way to deposits but you're still covered against fraud or the manager going bust.