Rental property vs Vanguard high dividend fund

AdrianC

£12.5k income from £325k value is 3.8%.
£12.5k income from £165k equity is 7.5%.

Given the amount that must be going on the agent's management fee, that sounds a chunk higher than I'd expect. If it's accurate, then I very much doubt you'll find a better return elsewhere, even before factoring in the capital growth.

Retired_Mortgage_Adviser

Based on the limited info in your post -

CGT (the assumed acquisiton price is the market value at the point of inheritance ie 2012) -
Total profit on sale is 95,000 split 50-50 with your wife, so 47,500 for each of you. Your total income is around 32,000 + 6500 (rental income) ie 38,500. Your wife's income is 6,500 rental income. So if you sold the flat today for 325,000, the CGT due for you should be around 9,000 and around 6,500 for your wife ie 15,500 in all. For purposes of simplicity, I'm not taking into account any selling costs, etc which will further reduce the CGT due.

Assuming selling fees of 5000, the net proceeds would be 325 less 5 (selling costs) less 160 (mortgage redemption) less 15.5 (CGT) so around 144,000 in cash hitting your bank account at the end of it all.

%Return for comparison to these funds being invested elsewhere
Now, different people will address this in different ways. In your place, I would start off with the 144,000 figure as the "invested amount" for the property. If you are getting 12,500 "profit", that would amount to around an 8.5% return. Even if you calculate it based on your equity in the property, the return would drop to 7.5%. So that is the figure that you are comparing it against for alternative investments.

As a portfoilio landlord myself, you appear to have a rental property that is giving you no trouble, is easy to let, managed well by a great LA and giving you a [STRIKE]good[/STRIKE] great ROI for a property in London, so do keep that in mind before considering changing the status quo.

glass22

AdrianC wrote: »

£12.5k income from £325k value is 3.8%.
£12.5k income from £165k equity is 7.5%.

Given the amount that must be going on the agent's management fee, that sounds a chunk higher than I'd expect. If it's accurate, then I very much doubt you'll find a better return elsewhere, even before factoring in the capital growth.

But your equity calculation is on growth not just dividend, the property is likely to also grow.

HC_

Does this have to be a binary either/or choice? Why not diversify and do both?

You imply you are on a repayment mortgage. You could change this to interest only and put the money saved in to a Vanguard stocks and shares ISA. The percentage return on this is likely to exceed your mortgage interest rate.

If you then want to up the ante further, remortgage and up your LTV to 75% and invest the money which is released. It probably isn't the best strategy to keep piling more and more equity in to the property when mortgage interest rates are so low.

AdrianC

glass22 wrote: »

But your equity calculation is on growth not just dividend, the property is likely to also grow.

I think you misunderstood me. I'm not commenting on the Vanguard fund at all.

The equity calculation is the equity the OP has in the property.
£325k sale value - £160k mortgage = £165k equity.

Obvs, sale costs (inc CGT) come off that.

BikingBud

Steveal wrote: »

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.

So from a property that was bought in 1996 for 50K and you inherited, you now owe 160k that seems like sound economics to me:eek:

I trust the money you have taken out, equity and rent, was invested soundly:(

AdrianC

BikingBud wrote: »

So from a property that was bought in 1996 for 50K and you inherited, you now owe 160k that seems like sound economics to me:eek:

He inherited £230k of equity, released £160k+ of that, and now has £165k of equity.

Even if the rest was invested in coke and hookers, surely all that matters is that he got good perceived value from every single second of it?

mark55man

AdrianC wrote: »

He inherited £230k of equity, released £160k+ of that, and now has £165k of equity.

Even if the rest was invested in coke and hookers, surely all that matters is that he got good perceived value from every single second of it?

I read that as cAke and hookers - which TBH sounds the better of the two options

AdrianC

mark88man wrote: »

I read that as cAke and hookers - which TBH sounds the better of the two options

It certainly puts G_M's posts in a whole new light.

Or, for a combination, muffin...

BikingBud

AdrianC wrote: »

He inherited £230k of equity, released £160k+ of that, and now has £165k of equity.

Even if the rest was invested in coke and hookers, surely all that matters is that he got good perceived value from every single second of it?

I haven't found the coke and hookers board on here, could you share a link please?