Why BTL vs shares ?

Fatbritabroad

A friend of mine has just advertised his btl in great Yarmouth

Flat is on for 105k and rent is 500 a month. It has a sitting tenant. By the time you pay a repayment or interest only mortgage you'd be left with 300 to 150 a month extra income. That's before cost of repairs void period etc. Id then get taxed 40%

Ive never considered btl so freely admit to being uneducated as weirdly I always understood shares better. About the only attraction with btl that I can see is the leverage and you might get capital growth but id say that's unlikely now given prices vs wage growth.

I could just about buy it outright but then all my money would be in one diversified asset.

I guess my question is am I missing something here? The income would be nice and I could put 40k down and buy two as there's two available and use that to buy more shares but it just doesn't seem that good an investment

Fatbritabroad

Edit. One undiversified asset even

Drp8713

I agree, never been tempted by BTL. It is tax inefficient on gains and income, illiquid, undiversified, high risk (gearing if you use a mortgage), high cost (agents fees, insurance, cost of borrowing if applicable), then you have void periods and having to maintain it. Lasty, bad tenants, could not pay the rent, court action, bailiff fees etc.

Sounds like a right PITA.

Wrap your shares in an ISA and buy a fund/trust that is well diversified and you have none of the above issues.

Fatbritabroad

I assume it's because you can 'see' property and because theres more mainstream news about house prices but I can 'see' my shares. Theyre there everytime i log on to my account (most days. i know i know but i genuinely just find it interesting now reading the scare mongering news and seeing how they change day to day. During the minor correction i just increased my monthly amount so I'm not going to panic and sell)

I queried why they were selling and they said its to get one closer to where they live. That sounds even less diversified to me they already own property there. Why would you want more? .

I pointed out some easy starter trackers but he just said (but the yield is only 1.8%i get 5 to 6% on property) i was like yeah that's 6%gross before mortgage repair costs etc. And your ignoring capital growth which can be exited atanytime and is tax free as i have it in an isa. I said if he wanted property he could look at property moose or land bay and diversify across hundreds of property

Alexland

Having previously been a landlord for a couple of years I much prefer the lower hassle and tax efficiency of ISA and pension wrappers. Still we made good gains on the leverage.

fiisch

Due to a turbulent period of employment, my dad recently started collecting his pension (he's 60), but is now back in work. With the lump sum (circa £40k) they received, they bought a BTL. They were concerned about their financial state come retirement, and wanted to do something with the lump sum to generate income.


The idea of investing is completely alien and seems like an enormous gamble, whereas BTL is a tangible asset and historically had you bought property in the 80s/90s and clung on through recessions, you'd have done extremely well, largely due to the capital growth.


Their outlook is about 5-10 years, and I'm not sufficiently knowledgeable on S&S nor do I want to be wrong for recommending the wrong thing for retirement, but for them opening an S&S would have been a gamble, whereas whilst a BTL is still a gamble, to them at least it feels more calculated.

AnotherJoe

fiisch wrote: »

Their outlook is about 5-10 years, and I'm not sufficiently knowledgeable on S&S nor do I want to be wrong for recommending the wrong thing for retirement, but for them opening an S&S would have been a gamble, whereas whilst a BTL is still a gamble, to them at least it feels more calculated.

I think the latter phrase is the key, it "feels" more calculated. It isn't, it is riskier. One item, one economy, one area, no liquidity, very vulnerable to a bad tenant. None of these apply to (say) a global stock market/bond investment.
Not to mention the hassle and legal pitfalls which get worse with every passing day. People invest in what they are familiar with. I did it, i made a decent profit, but i wouldn't do it again it enough hassle maintaining my own house let alone doubling the workload.

I think it was Warren Buffet (most financial quotes are attributed to him anyway) who said soemthing like "you dont have someone outside your front door yelling the house price as it changes every five minutes" . So, stocks seem like a riskier investment as every time theres a dip in the market its headlines on the news. If there's a rise, there's silence and definitely not the 5 minute piece on how markets lost umpty billion today when they dip.

Trouble is you are dammed if you do dammed if you dont, if you suggest shares and dad invests and they drop he'll probably panic sell and blame you. If they rise, he'll probably think that houses would have gone up anyway.

lulabelle1

I bought a B2L property 3 years ago. I'd been going down the OP Mortgage route but felt I was missing something.

I therefore took back a chunk of money from my OP's to fund the 30% deposit.

Since then I've also started to focus on paying in to my SIPP and S&S ISA with just smaller mortgage OP's.

I never seem to read an positive comments about B2L, everybody says it's not tax efficient, that it'd be easier to just invest in shares within an ISA etc etc. I view it a little differently, but maybe I'm missing something.

I purchased my B2L 3 years ago for £114,500. I paid a 30% deposit and took a mortgage with no big upfront fee. The mortgage is £383 per month over 25 years.

My rent started at £550 with the original tenant (was already in situ). This increased to £650 with our second tenant a year ago.

We had 2 weeks in between tenants, so have missed out on 2 weeks rent in just over 3 years.

The rent paid by the tenant funds:
383 mortgage
11 insurance
100 Tax
60 month to build up for adhoc expenses
100 month S&S investment

We look after our tenant well. In return our tenant/s is/are paying the other 70% of the purchase price of our property. (we funded the 30% deposit from our savings).

In addition to paying for 70% of the property, the tenant is funding a £100 investment in to our S&S ISA.

Assuming that the rent does not increase over the 22 years (unlikely), the £100 month investment will be worth approx £40k (assuming 5% growth).

The house has increased in value to approx £150k, assuming it does not increase in value at all over the next 22 years (again unlikely), then we're looking at the following:

Initial Investment:
£34,350 Deposit
£970 Legals
£230 Mortgage Fees
£60 fee to switch tenancy agreement to our name
Total Initial Investment - £35,610

22 Years:
£40k S&S ISA (£100 month left over after mortgage, costs, tax etc)
£150k Property - mortgage cleared
Total Value - £190k

If I'd invested the £35,610 in a S&S ISA over the 25 years (assuming the same 5% growth rate that I applied to the leftover £100 per month), then it would be worth £80k.

So, it looks like the B2L could be worth £110k more. That's based on the value of the property NOT increasing in the next 22 years. And the rent not increasing. CGT would only apply if the value increased further, which I guess it will, but that will just result in it being an even better investment?

I'd ideally like to buy another, especially after putting these figures together. The new stamp duty definitely makes it less interesting in the short term, but over the 20/25 year investment (which is how I look at my B2L), then it still looks to me to be the better option?

Drp8713

fiisch wrote: »

Due to a turbulent period of employment, my dad recently started collecting his pension (he's 60), but is now back in work. With the lump sum (circa £40k) they received, they bought a BTL. They were concerned about their financial state come retirement, and wanted to do something with the lump sum to generate income.


The idea of investing is completely alien and seems like an enormous gamble, whereas BTL is a tangible asset and historically had you bought property in the 80s/90s and clung on through recessions, you'd have done extremely well, largely due to the capital growth.


Their outlook is about 5-10 years, and I'm not sufficiently knowledgeable on S&S nor do I want to be wrong for recommending the wrong thing for retirement, but for them opening an S&S would have been a gamble, whereas whilst a BTL is still a gamble, to them at least it feels more calculated.

I think BTL is an investment for people that dont understand investing.

It is still much better than sitting in cash, and as London in recent years has shown, you can buy bad properties in bad areas and still get rich if the market is on your side.

Drp8713

lulabelle1 wrote: »

I bought a B2L property 3 years ago. I'd been going down the OP Mortgage route but felt I was missing something.

I therefore took back a chunk of money from my OP's to fund the 30% deposit.

Since then I've also started to focus on paying in to my SIPP and S&S ISA with just smaller mortgage OP's.

I never seem to read an positive comments about B2L, everybody says it's not tax efficient, that it'd be easier to just invest in shares within an ISA etc etc. I view it a little differently, but maybe I'm missing something.

I purchased my B2L 3 years ago for £114,500. I paid a 30% deposit and took a mortgage with no big upfront fee. The mortgage is £383 per month over 25 years.

My rent started at £550 with the original tenant (was already in situ). This increased to £650 with our second tenant a year ago.

We had 2 weeks in between tenants, so have missed out on 2 weeks rent in just over 3 years.

The rent paid by the tenant funds:
383 mortgage
11 insurance
100 Tax
60 month to build up for adhoc expenses
100 month S&S investment

We look after our tenant well. In return our tenant/s is/are paying the other 70% of the purchase price of our property. (we funded the 30% deposit from our savings).

In addition to paying for 70% of the property, the tenant is funding a £100 investment in to our S&S ISA.

Assuming that the rent does not increase over the 22 years (unlikely), the £100 month investment will be worth approx £40k (assuming 5% growth).

The house has increased in value to approx £150k, assuming it does not increase in value at all over the next 22 years (again unlikely), then we're looking at the following:

Initial Investment:
£34,350 Deposit
£970 Legals
£230 Mortgage Fees
£60 fee to switch tenancy agreement to our name
Total Initial Investment - £35,610

22 Years:
£40k S&S ISA (£100 month left over after mortgage, costs, tax etc)
£150k Property - mortgage cleared
Total Value - £190k

If I'd invested the £35,610 in a S&S ISA over the 25 years (assuming the same 5% growth rate that I applied to the leftover £100 per month), then it would be worth £80k.

So, it looks like the B2L could be worth £110k more. That's based on the value of the property NOT increasing in the next 22 years. And the rent not increasing. CGT would only apply if the value increased further, which I guess it will, but that will just result in it being an even better investment?

I'd ideally like to buy another, especially after putting these figures together. The new stamp duty definitely makes it less interesting in the short term, but over the 20/25 year investment (which is how I look at my B2L), then it still looks to me to be the better option?

You are not comparing like for like.

Firstly, if you sold your £150k property at the end, you would pay 28% CGT any any gains over the allowance

Secondly, you borrowed £80k to get that £190k (less taxes) return. If you invested that £80k plus your £36k in a S&S ISA at 5% over 25 years you would have £390k.

lulabelle1

Drp8713 wrote: »

You are not comparing like for like.

Firstly, if you sold your £150k property at the end, you would pay 28% CGT any any gains over the allowance

Secondly, you borrowed £80k to get that £190k (less taxes) return. If you invested that £80k plus your £36k in a S&S ISA at 5% over 25 years you would have £390k.

Firstly, CGT - after allowance, would be £3,388. It still makes the B2L a good investment.

Secondly, I did not borrow £80k. My upfront cost £35,610.

Thirdly, I have no idea where your borrowed £80k is coming from? The only investment from my in to the B2L was the original £35,610

Fourthly, even if I had have borrowed £80k (which I didn't) and then added that to another £36k, that would be an amount of £116k, which if invested over 25 years @5% would be £261k. (Not £390).

So, I stand by my original thoughts......

I invested £35,600 in a B2L
After 25 years, the property will be paid for and I will also have at least £40k invested as a result of the monthly surplus.

This includes no property growth for 22 years, which as we know is unlikely, therefore making the investment even more interesting.

I'm not saying that everyone should invest in B2L. I do invest in both my SIPP and S&S ISA. I'm simply saying that I do not understand why people seem so against negative about B2L.