Rental property vs Vanguard high dividend fund

Steveal

I have a long standing rental property in outer London that I inherited many years ago. I mortgaged it a while ago to a BTL mortgage and have been paying it down slowly. It's been fully managed by a letting agent from the start and I've never visited since I first inherited it.

I was talking to a mate yesterday who said that I would be better off just selling the property and putting the proceeds in a high-yield Vanguard index fund and that I could get the same returns and income with zero work and similar risk.

The net annual before-tax income from the property (after letting agent fees, ground rent, service charges, 2 week void assumption, £500 maintenance assumption, mortgage interest, insurances, etc is about £12,500.

How do I go about comparing the two? For instance how would I compare the "returns" from the rental vs how much I would get if I sold it and put the net proceeds in a Vanguard fund?

Slithery

Have you worked out how much CGT you will have to pay if you sell the property?

Crashy_Time

You can`t predict returns in the future from an index fund, you can predict roughly what rent you could achieve on a certain property although voids are more of an unknown, and future/present government might decide to tax you harder. Why not just put some of the after tax return into a fund and also keep paying down the mortgage, and maybe move your future allocations more towards equities/bonds/credit/corporate bonds and cash and away from property (keep one but don`t buy any more for investment)

mark55man

Probably better off asking a similar question in the pensions and investment forum, but maybe not limiting to a comparison one particular fund - asking about alternative strategies.

This forum is strong on property advice and may be prone to confirmation bias for someone already with a property

tom9980

Crashy_Time wrote: »

You can`t predict returns in the future from an index fund, you can predict roughly what rent you could achieve on a certain property although voids are more of an unknown, and future/present government might decide to tax you harder. Why not just put some of the after tax return into a fund and also keep paying down the mortgage, and maybe move your future allocations more towards equities/bonds/credit/corporate bonds and cash and away from property (keep one but don`t buy any more for investment)

Never thought I would see the day you would be more bullish on property than me....

tom9980

Steveal wrote: »

I have a long standing rental property in outer London that I inherited many years ago. I mortgaged it a while ago to a BTL mortgage and have been paying it down slowly. It's been fully managed by a letting agent from the start and I've never visited since I first inherited it.

I was talking to a mate yesterday who said that I would be better off just selling the property and putting the proceeds in a high-yield Vanguard index fund and that I could get the same returns and income with zero work and similar risk.

The net annual before-tax income from the property (after letting agent fees, ground rent, service charges, 2 week void assumption, £500 maintenance assumption, mortgage interest, insurances, etc is about £12,500.

How do I go about comparing the two? For instance how would I compare the "returns" from the rental vs how much I would get if I sold it and put the net proceeds in a Vanguard fund?

The current value of the property, your tax bracket, a full breakdown of all the cost, potential capital gains tax, selling fees, the list is near endless to make an accurate comparison.

My gut feeling based on your £12.5k return is your friend may well be correct especially if you can stuff the cash in an stocks and shares ISA or pension wrapper.

Owain_Moneysaver

You have to look at the gross and net rate of return on the property investment. You don't tell us the current value of the property so we can't judge whether £12500 pa net is a good return or not.

Also bear in mind that (hopefully) you will be benefiting from the property increasing in value with the market over the longer term. At the moment, London property prices may be on the low side and it may be a bad time to sell.

And investment funds aren't guaranteed. If the fund or the underlying investments crash, you could lose all your capital. Even if house prices crash, you still have a house you can live in. And in most parts of London, although the market will fluctuate, I think it's unlikely that a house would fall so far to be worthless. Planning blight for new motorway/railway or being caught up in a gentrification/compulsory purchase scheme could certainly see your house price hit, but that only happens to a very small proportion of houses.

I would suggest that you get a little more active in managing the property yourself - you may not be getting the best deal from your agent, and there may be improvements you could make to the property which would attract a higher paying tenant and provide a better return on investment (even after the cost of the work) which your agent might not be recommending to you.

mark55man

In a world where a Vanguard equity funds have lost all their value, I don't think a property in London would be a particularly great hedge. - ie would be strongly correlated to a global financial crisis

Retired_Mortgage_Adviser

As has been mentioned above, there are many variables involved in working out what your return is and what the net proceeds might be if you sold it today. If you feel comfortable sharing the following, I could give you some rough and ready figures -
- property value, outstanding mortgage, value of the property at the point your inherited it, tax band

AdrianC

Steveal wrote: »

The net annual before-tax income from the property (after letting agent fees, ground rent, service charges, 2 week void assumption, £500 maintenance assumption, mortgage interest, insurances, etc is about £12,500.

Which is lovely, an' all, but gives us no clue as to what return on your equity you're getting, since we have no idea what equity you have in it.

And frankly I'd be amazed if your "£500/yr maintenance assumption" is going to be even remotely correct for a totally hands-off agent-maintained property that you've owned for "many years". If it is historically correct, you're due a big adjustment...

Steveal

Thank you all for your comments. I didn't even think of the CGT!

My father bought the property for 50k in 1996 and I inherited it in 2012. I gifted 50% of the equity to my partner then as someone had suggested that it will reduce my tax bill. It's a 2 bed flat in a block of about 20 flats. The value in 2012 would have been around 230k (based on the sale price of an identical flat in the block in that year).

The current value is around 325k (against based on the latest sale of an identical flat).

The mortgage is currently around 50% LTV, approximately 160k outstanding.

My income is 32k (not including the rental income) and my partner doesn't work at the moment so has no earnings except for a small amount of savings interest, again excluding the rental income.

Adrian - Sorry if I wasn't clear. The expense figures are all quite conservative. We have had no more than 10-15 days of void at most over the whole period from 2012 to present. The flat is a 3 minute walk from a zone 3 tube station and hence has always been easy to re-let. Since it's a flat with only electric heating, the only maintenance we've spent money on over all these years is replacing a broken washing machine and painting the interiors twice. So the £500/year figure is actually quite conservative and borne out by our experience over 7 years. We have been really lucky with the Letting Agent, they are a local independent firm with their office very close to the property and have done a sterling job over the years.