UK BTL property vs stock market fund?

skillboy

I have around £60,000 to invest and I have narrowed it to two options:

Option 1 - Purchase a UK BTL property.
Deposit 25% i.e. £50,000 deposit (plus £10,000 fees & SD)
Property value = £200,000

Ongoing monthly costs:
Mortgage (£150k) at 3% (interest only, fixed for 5 years) = £400
Insurance = £50
Managing agent fee = £80
Misc = £50
TOTAL monthly costs = £580
Annual costs = £6,960

Income
Rent = £800
Assume rented 10 months per year so total annual rent = £8000.

Net profit per year = £1,040.

Assume UK property prices rise at 2% per year.
After 15 years the property should be worth around £269,173.
After deducting mortgage of £150,000, net should be £119,173.
After adding in 15 years net rent total is £134,773.

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Option 2 - Invest £60,000 into low cost index fund such as S&P500
Assume average net return of 7%.
After 15 years £60,000 should turn into £165,541


On the face of it option 2 looks the clear winner.

Thoughts?

marlot

You've not included tax with either option.

Option 2 is a lot more liquid (good thing). With option 1, you have to sell the whole thing to get some money back.

jamei305

Yes, especially when you add in the missing costs (property maintenance??) and tax, and that the 3% is only fixed for 5 years, not 15.

AnotherJoe

expanding upon the tax side, , if this goes into a pension add anywhere from 30-50% to the investment due to tax relief* and less NI (depending if this is done via salary sacrifice or not and if you are high rate taxpayer . Or no CGT if its in an ISA.
Then yes there's liquidity, much harder to spend 10% of a house than an investment.
Also, hassle. Your investments will never call you up to complain about issues, nor require background checks, nor jumping through numerous hoops regarding legalities nor require evictions nor legal permission to sell all or part.
I wouldn't pick the S&P500 alone, I'd go more global than that.

* you'd have to add over a few years.

steampowered

Option 2 does seem like the clear winner.

Particularly because of the tax considerations, as pointed out by AnotherJoe in yet another one of his superb posts.

For Option 1, I think your assumptions of property prices rising at 2% and only getting 10 months rent out of 12 are quite conservative. Still that probably won't be enough to overtake Option 2 and the interest rate on the mortgage is likely to go up in the future too.

sendu

Doing it slightly more realistically (but still not accurate), the monthly flat profit after tax might be around £830, assuming you have a low paying job as well and pay 20% tax on everything. But you can increase your rent in line with inflation each year, so your 15 year rental income might be something like £15,500.

Then you have to pay CGT when you sell the flat, which might be around £12,000.

Final net: £123,000, for a CAGR of 4.9%.

Meanwhile, the long term average gain on a global index tracker might have been around 4% above inflation, so 6% returns using the same 2% inflation estimate from the flat calculations.
After the first few years it should be possible to get all of such an investment in an ISA, and until then dividends and capital gains should be covered by allowances, so no taxes to pay.

Final net: £144,000, CAGR 6%.

Now, house prices could keep going up higher than inflation, or there could be a big market crash that doesn't recover in time, but the balance of probabilities lies in favour of the stock market investment.

badger09

Do you want to be a landlord, with all the regulations & responsibilities involved?

BTL is not always (ever?) the sure fire money spinner it is perceived:cool:

Bravepants

badger09 wrote: »

Do you want to be a landlord, with all the regulations & responsibilities involved?

BTL is not always (ever?) the sure fire money spinner it is perceived:cool:

Especially with the occasional dodgy tenant!

justforlaugh

Why do all think that Option 1 is a winner?
As someone with almost zero investment experience, I am wondering how you can ensure the investment get a net return of 7% or even just 3%?
I understand that you could lose your money in investment.

eskbanker

justforlaugh wrote: »

Why do all think that Option 1 is a winner?

They don't! Everyone seems to favour option 2....

justforlaugh wrote: »

As someone with almost zero investment experience, I am wondering how you can ensure the investment get a net return of 7% or even just 3%?

Neither option can ensure that net return, but long-term averages support the use of a well-diversified investment portfolio of funds, etc. Multi-asset funds have soared in popularity in recent years, effectively delivering that diversification at a low cost to those without time or knowledge to conduct extensive research.

justforlaugh wrote: »

I understand that you could lose your money in investment.

Of course, but that also applies to both equity-based and property investments. Again, adequate diversification offers protection against loss over the long term, during which it would be expected to compensate for the inevitable short-term fluctuations....

Malthusian

justforlaugh wrote: »

Why do all think that Option 1 is a winner?

On this forum most people don't. On a forum for landlords it would probably be different.

Where people do prefer option 1, it is in most cases because people struggle with the abstract concept of stockmarket investment and like the tangibility of property. They like knowing that they own a building somewhere, as opposed to a zillionth of millions of buildings all over the world which is what shares give you.

Some believers in option 1 are risk-seeking investors who want to invest with leverage, which is much easier with property than with shares.

As someone with almost zero investment experience, I am wondering how you can ensure the investment get a net return of 7% or even just 3%?

You can't. All these percentages are guesses.