Stock Market or buy to let?

beetleboy72

Morning all, I'd appreciate your views please?. I recently was bequithed a lump sum, not life-changing but useful, I was planning to top up pension pot but it did occur to me that a deposit on a flat may be as good, if not better option. I also have 2 kids who could inherit from me. I'd be interested to hear your views to clarify this for me! Thanks

Gary1984

1. You can fire it into your pension and forget about it wheras being a landlord is a huge hassle.
2. The pension will receive tax relief whereas with a flat you need to pay stamp duty, income tax, mortgage arrangement fees, legal costs, insurance, capital gains tax etc
3. With a flat you have all your eggs in one basket. With your pension you can diversify over a number of different asset classes such as shares, bonds, property and so on.
4. Once you reach pension age it's very easy to get the money out of your pension. With a flat you need to sell it. This is a hassle, may take a long time, will incur more costs and you may not get what you expected. 

So I'd say pension. 

MEM62

BTL Is nowhere near a tax efficient as a pension.  Not only are you taxed on the income but you will be lumbered with the additional stamp duty.  Being a landlord is not passive.  It comes with responsibilities and you have to spend time running your business.  There are risks - for example, a nightmare tenant can cost you thousands.  Lastly, whatever calculations you may have done I guarantee that you have under-estimated your costs.   
A pension is tax efficient and passive. Dependent on your tax position you will get 25% gain on the day you put the money in. 

It still amazes me that anyone still believes that BTL's are a good alternative (or any kind of alternative) to a pension.  

Ceme3000

Pension is also useful for inheritance tax planning, as you mention inheritance for your kids.

bolwin1

Whilst I agree with everything said above & wouldn't personally consider getting into BTL now, you have asked this on a pensions board, so will get a view from people interested in pensions. To get some balance, it might be an idea also asking the same question on the house buying, renting & selling forum. 

MinuteNoodles

MEM62 said:

BTL Is nowhere near a tax efficient as a pension.  Not only are you taxed on the income but you will be lumbered with the additional stamp duty.  Being a landlord is not passive.  It comes with responsibilities and you have to spend time running your business.  There are risks - for example, a nightmare tenant can cost you thousands.  Lastly, whatever calculations you may have done I guarantee that you have under-estimated your costs.   
A pension is tax efficient and passive. Dependent on your tax position you will get 25% gain on the day you put the money in. 

It still amazes me that anyone still believes that BTL's are a good alternative (or any kind of alternative) to a pension.  

Not convinced. Here's the numbers I've been looking at where I live as I currently have £20k sat in a Santander account which I intend to not be there in a few months and one option was to put it into my SIPP/ISA or invest in a BTL. I've been a landlord before doing it directly and not using a letting agency so this isn't my first rodeo. I've also had a nightmare tenant who wrecked a property that came with a five figure repair bill so I've been there and done that too and learned the lessons.

So....
One bed flat with sitting tenant £60,000. Part of a converted former mill, in very good condition.
Deposit £12,000
Mortgage interest only £48k at 2.1% fix for 5 years = £84 a month
Maintenance fees = £100 a month.
Total outgoings per annum including landlord insurance and annual gas safety check = £2458 / £204 a month.

Income. Currently let out at £385 pcm, long sitting tenant. Even if they left and I ended up with a tenant on LHA (very unlikely given demand for non-letting agency lets) the LHA for the area is £349 a month.
Profit = £181 a month or £2712.

So...£1800 stamp duty, £600-£700 in legals, total investment out of my pocket £14,400-£14,500.  Wife has plenty of unused personal allowance so it can go in her name so tax paid on income = £0.

Unless I have got the maths wrong from me spending £14,500 (and leveraging £48k of the bank's money) I get a return of ~£2700 or ~19%. 5 years, the length of the fix, sees my entire stake returned to me in full which of course I can then leverage again or pop into my pension. From thereon in I've got effectively a £2700 a year income plus whatever the property rises in value (it'll be well within the CGT allowance unless Parliament moves to York), a return much more than putting that £14,500 in a SIPP would get me even with the additional growth from the HMRC top up even in a boom year. And I can put that £2700 income into a SIPP and get the HMRC top up year after year after year.

And yes whilst you do get a 25% boost from HMRC the day you put your money in it's a one off. 

beetleboy72

Thanks people, I know that rental is a hassle and BTL is less attractive than it was, your views have helped me settle this!

[Deleted User]

“Unless I have got the maths wrong from me spending £14,500 (and leveraging £48k of the bank's money) I get a return of ~£2700 or ~19%. “

You invested 60K plus stamp duty.  That is the money at risk. Your return is 4% per year plus or minus capital appreciation/depreciation. 

If you want, you could leverage your stockmarket investment in exactly the same way.  

What leveraging does is multiply your gains and your losses. If the property were to take a 20% hit in value, you would lose close to 100% of your capital.  Nothing’s wrong with leverage but you need to understand what you are doing when calculating return and comparing against alternatives. 

Also, mortgage interest could go up in 5 years and your maintenance allowance seems low 

TBC15

Even on my worst investment days and I’ve had a few over the last 30ys I’ve never had an investment ring me up in the middle of the night to say the roof is leaking.

jimi_man

Someone has already pointed out the flaw in your maths. Also there doesn't seem to be any allowance for under occupancy or redecoration. It's extremely illiquid (though pensions are too, under 55), and unless you have loads of them, lacks diversification. 

Thrugelmir

TBC15 said:

Even on my worst investment days and I’ve had a few over the last 30ys I’ve never had an investment ring me up in the middle of the night to say the roof is leaking.

That would be considered to be inside information. 7 am is when news is released.