UK BTL property vs stock market fund?

Alexland

We cannot be certain of the returns under either scenario so it's based on likely outcome.

Given current stock market valuations particularly in the US then an average stock market total return of 7% over the next 15 years looks unlikely. For a 100% equities diversified investment then an average return of 5% after fees looks more realistic. The longer you invest the more likely you are to do well.

Being a landlord isn't much fun and I wouldn't go there again under the current tax arrangements.

Alex

justforlaugh

Sorry for the typo. Should option 2 not 1.

Thank you eskbanker, I will check 'Multi-asset funds' which seem suitable as a starting point.

MisterMotivated

skillboy wrote: »

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

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.

Thoughts?

My first thought is that you forgot that you initially invested £50k in the property, so your actual profit would only be £84,773

You also forgot about tax on the £1,040 per year profit, which leaves a frankly ridiculous return

james_09

You are basing your return on the property on a 4% yield - £8k return on £200k purchase (ignoring purchase costs so actually even lower).

Try rerunning your figures on an 6-8% yield (yes they do exist). You will find the property comes out ahead because you are leveraging almost 4 times your capital with the mortgage..

Setting aside the extra time and responsibly of running a business, if you go for a buy to let, then rental yield and rental demand for the area is absolutely key to making a good return.

The property you have based your figures on is not a good BTL investment.

Thrugelmir

Alexland wrote: »

For a 100% equities diversified investment then an average return of 5% after fees looks more realistic.

Care to share the research? Most commentatators including the oft lauded Vanguard. Have a guarded long term outlook.

Alexland

Thrugelmir wrote: »

Care to share the research? Most commentatators including the oft lauded Vanguard. Have a guarded long term outlook.

We are talking about 15 years here and Vanguard tend to do 10 year medium term forecasts. They are expecting an initial 3-5% return followed by improving prospects. I think most would agree a sustained 7% is unrealistic.

https://www.vanguard.co.uk/documents/adv/literature/vg-economic-outlook-2019.pdf

Returns in global equity markets are likely to be about 3%–5% for sterling-based investors, slightly down on expected returns this time last year. This also remains significantly lower than the experience of previous decades and of the post-crisis years, when global equities have risen over 10% a year since the trough of the market downturn. We do, however, foresee improving return prospects building on slightly more attractive valuations (a key driver of the equity risk premia) combined with higher expected risk-free rates.

Dazed_and_confused

The other thing the op needs to consider is that the profit for tax purposes will not be £1,040.

The largest monthly cost quoted is the mortgage and from 6 April 2020 0% of this is an allowable cost for tax purposes.

So the profit will be significantly higher.

The finance costs may mean the op can claim a basic rate tax credit against their rental income tax liability however the higher profit figure can still increase their overall tax payable even if the tax credit can be claimed.

MarkCarnage

Only touched on by one poster above, but option 1 is leveraged, option 2 is not. Fine if your prognosis for house prices works....and in particular the single house you intend to buy. Less good if it doesn't.

So less liquid, higher costs, riskier insofar as it's leveraged and not diversified.....I think you know which side I would come down on......

AnotherJoe

Dazed_and_confused wrote: »

The other thing the op needs to consider is that the profit for tax purposes will not be £1,040.

The largest monthly cost quoted is the mortgage and from 6 April 2020 0% of this is an allowable cost for tax purposes.

So the profit will be significantly higher.

The finance costs may mean the op can claim a basic rate tax credit against their rental income tax liability however the higher profit figure can still increase their overall tax payable even if the tax credit can be claimed.

Did you mean "lower" ?

Dazed_and_confused

No, I did mean higher.

As the mortgage interest will no longer be claimable as an expense at all from 6 April 2020 the profits for tax purposes will inevitably be higher.

Which could easily mean more tax to pay overall even after taking into account any finance cost tax credit the op can claim.