70k to invest for income - best options

Technoholic

Thrugelmir said:

Technoholic said:

Gary1984 said:

Both equities and property has an income component (dividends, rents) and a growth component (share price movement, house price change). Nobody knows what those components will actually be in advance so hard to say what the better investment is in pure return terms.

A buy to let mortgage will increase your yield as you only need to put down the deposit but also increases your risk as you still need to pay the interest even if the property is unrented. So this is a risk as well as a potential advantage.

However B2L has additional disadvantages of

1) Hassle/work

2) Tax, equities are tax free when in an ISA

3) Expenses, trackers cost 0.1% in expenses. Maintaining a property would cost considerably more

4) Lack of Diversification. If the property is empty you get zero income. With equity funds you'll own hundreds of companies. Even if some stop dividends unlikely they all would at once 

2) Tax, equities are tax free when in an ISA
agree again, though looking at this from a non income perspective, as my income after expenses would be minimal with a rental, my tax implications would therefore be minimal too, but something to be considered for sure.

Any future capital gain made on disposal of the property will be subject to tax at the prevailing rates at the time. There's rumours that rates of capital gain tax will be aligned with income tax in the future. 

I have factored that in, but it's impossible to know what gain or loss I'd make on a purchase of property 20+ year in the future, so in some respects it's irrelevant, although I am not ignoring it completely. If I've made enough capital to be paying CGT then I'll take the hit on the CGT in the hope that the increase has been substantial enough to make it worthwhile. Basically, if I go down the BTL route, I have to be comfortable with all the pitfalls, and so far I am, I know it will be work, but I'm happy to do that. This is very much based on doing that instead of the stock market where I have enough time researching and managing my SIPP to be adding another portfolio to manage. Maybe mentally I just find the idea of property easier to quantify than stocks and shares. 

Also, my current year CGT is based on my income band already, higher vs lower rate, so what do you mean when you say aligned with income tax?

Technoholic

Oh I just understood I think, you mean the bandings will actually be the same percentages as each income tax band instead of the 18/28% it is now, right?

Thrugelmir

Technoholic said:

Oh I just understood I think, you mean the bandings will actually be the same percentages as each income tax band instead of the 18/28% it is now, right?

Was a similar system in the past. The bill for the pandemic needs paying. CGT reform is an easy win as impacts relatively few people. Generally the rich. 

Audaxer

Technoholic said:

But then surely I'm eroding the capital rather than potentially growing it? It's not a priority but I'd rather not dig into it if possible. 

Dividend based income was my real alternative thought, if 1.5% is the most I could expect that's less than I was basing my calculations on

You can set-up an income portfolio of funds with dividend income around 3.5% to 4% and still accept some capital growth. Some Investment Trusts have good yields and have been able to pay rising dividends every year for decades - see link below:
Dividend heroes | The AIC

However bear in mind that many investors, even retirees looking for income, consider a more diversified portfolio including growth funds a better option. If the capital value of fund grows by say 10% in a particular year, and you sell 4% for income, you would not be eroding capital.  

gozaimasu

Thrugelmir said:

The bill for the pandemic needs paying.

Why don't we start taxing massive lottery wins? £500k+

Thrugelmir

gozaimasu said:

Thrugelmir said:

The bill for the pandemic needs paying.

Why don't we start taxing massive lottery wins? £500k+

Put the suggestion to the Treasury.  Though taxing wins maybe counter productive. With net tax revenue generated small.  

Technoholic

All very useful discussion here, I'm definitely on the fence about what to do, the simpler option is definitely a diversified set of funds but lets play devils advocate and maybe someone can help me understand why it's a better option. 

Let's base this on my 70k as a 25% deposit on a property. For simplicity I will ignore any net profit made while carrying out the BTL endeavour, so I'm purely thinking of owning a BTL property, with a 20 year mortgage of 210k. Not accounting for the fact that I may have period without tenants, I may have to invest further to fix issues and so on, at the end of 20 years, even if the house market netted out to zero gains or losses, I would have a property worth 280k with no mortgage. I'm very much simplifying this scenario but bear with me. 

If I started with 70k in a diverse set of funds and/or other investments, while no one can predict the stock market or any investment type really, could expect in 20 years to end up in a similar position? Genuine question, because if you say it's likely that the 70k would turn into, let's say 250k, but it was much easier to not worry about BTL, then that's a no brainer 

I'm talking very hypothetically here because I understand the property market more than the equity investment market

grumiofoundation

Technoholic said:

Gary1984 said:

Both equities and property has an income component (dividends, rents) and a growth component (share price movement, house price change). Nobody knows what those components will actually be in advance so hard to say what the better investment is in pure return terms.

A buy to let mortgage will increase your yield as you only need to put down the deposit but also increases your risk as you still need to pay the interest even if the property is unrented. So this is a risk as well as a potential advantage.

However B2L has additional disadvantages of

1) Hassle/work

2) Tax, equities are tax free when in an ISA

3) Expenses, trackers cost 0.1% in expenses. Maintaining a property would cost considerably more

4) Lack of Diversification. If the property is empty you get zero income. With equity funds you'll own hundreds of companies. Even if some stop dividends unlikely they all would at once 

2) Tax, equities are tax free when in an ISA
agree again, though looking at this from a non income perspective, as my income after expenses would be minimal with a rental, my tax implications would therefore be minimal too, but something to be considered for sure.

Why do you think your tax implications will be minimal? 
Rental income is taxable.
The tax treatment of mortgage interest is now less favourable, especially for higher rate tax payers.
If you are planning to get a repayment mortgage the capital that is being paid off is profit and you need to pay tax on it even if you don't get it in your pocket there and then. 

Aceace

Hi @Technoholic, 

Plenty of ideas for you to think about above for generating an income from your £70k. Like a few others, I would caution against the BTL. My partner has one and it's difficult to describe the amount of stress involved at times in dealing with tradesmen to sort issues in a property that's occupied by someone else, let alone the periods without income and the downright awkwardness of some tenants. However, it might be worth considering if you have particular skills in managing tenants and property maintenance. 

Another option that hasn't been mentioned where you could gain an income based on property, is to invest in property secured P2P. This could be anything from the simplest, lowest risk option paying 4% (Loanpad) which was recently discussed in this thread: https://forums.moneysavingexpert.com/discussion/6308592/loanpad-p2p-any-reviews-experience-of-them-here-worth-a-dabble/p1.

Or Kuflink, who pay 7% for their fully automatic 5 year term account. 

Or CrowdProperty who pay 7 to 8%, though it's difficult to get funds deployed here due to its popularity, especially if your only willing to use their auto invest account. 

Or Proplend, who pay 5 to 12% depending on risk, secured against commercial property. Again, its difficult to get funds deployed due to it's popularity. 

All of the above are debt based investments, have fully automatic options, and can be ISA wrapped subject to the usual allowances. There are many other reputable platforms: CapitalRise, LandlordInvest, SoMo, HNW Lending. Spreading your funds among several platforms would help reduce the risk of platform failure. 

There are also platforms where you can invest in property equity as well as debt, so there is the potential of capital gains and higher returns, but the risk is much higher and many of these loans only pay returns on completion, so you would need to arrange to have regularly maturing loans to achieve an income, which is difficult, but not impossible, I do it. There are also many other options that aren't property based, but you seemed to have a property bent. 

If your interested, then make sure you've fully understood the platform(s) risks. 4thway are probably the best source of info and platform analysis. The P2pindependentforum.com is a good place to discuss or seek users views. 

george4064

Technoholic said:

All very useful discussion here, I'm definitely on the fence about what to do, the simpler option is definitely a diversified set of funds but lets play devils advocate and maybe someone can help me understand why it's a better option. 

Let's base this on my 70k as a 25% deposit on a property. For simplicity I will ignore any net profit made while carrying out the BTL endeavour, so I'm purely thinking of owning a BTL property, with a 20 year mortgage of 210k. Not accounting for the fact that I may have period without tenants, I may have to invest further to fix issues and so on, at the end of 20 years, even if the house market netted out to zero gains or losses, I would have a property worth 280k with no mortgage. I'm very much simplifying this scenario but bear with me. 

If I started with 70k in a diverse set of funds and/or other investments, while no one can predict the stock market or any investment type really, could expect in 20 years to end up in a similar position? Genuine question, because if you say it's likely that the 70k would turn into, let's say 250k, but it was much easier to not worry about BTL, then that's a no brainer 

I'm talking very hypothetically here because I understand the property market more than the equity investment market

Hypothetically speaking you won’t have a mortgage free property in 20 years time unless you throw everything at the mortgage (I.e. don’t take any income), pay lots of ERCs and if you’re lucky with tenants.

As others have suggested, I would stick it in a Global Equity tracker. I would say it would be reasonable to assume 7-8% per annum over the long run, so estimated portfolio value in 20years time would be £70k x (1.07^20) = £271k or £326k at 8% per annum. At a later date you can start harvesting an income from it, or invest in some dividend paying ITs that will provide income when you actually need it.