Why would anyone... (question re REITS / Property)

Mr.Generous

Malthusian said:

Mr.Generous said:

A terraced house bought for £50k (10 years ago) now rents out at £650 pcm, a gross yield of 15.6%

Not how yield works - the gross yield is 650 * 12 / 110000 which is 7.1%pa.

Errr no. I paid £50k what the house is now worth isn't what I paid.

so 650x12 / 50000

Mr.Generous

Malthusian said:

How does it compare - say I'd invested the £50k in fund?

An investment in the FTSE World TR ten years ago would be £141k with a 0.5%pa allowance for charges. That's total return including dividends, so we would also need to add on your total rent over 10 years to the £110k for a fair comparison. 

But a FTSE World tracker is entirely passive and much less risky. As well as being more tax-efficient.

I'm not going to do the exact maths, the rent started at £450 and worked its way up, but a year ago it reached £50k - my first renter to fully repay the purchase price in rent. So about £57k in rent to date.

I have spent a few £ on landlord insurance (ave about £100 a year) gas safe, elec safe and a few minor repairs and decorating. I probably put more time in than you would investing in shares, but I'd say they come out pretty even for a return. Both a pretty decent choice really, rather be on the "hows my investment doing" side of MSE than the alternative I guess.

Bostonerimus1

sixpence. said:

Linton said:

I hold the AEW REIT.  Its price is now almost exactly the same as both 10 and 5 years ago.  It was volatile during COVID but appears to have settled down.

AEW has paid £8/year/share dividend for at least the past 5 years.  This currently represents a yield of 8%.  As a REIT its dividends should be relatively stable as they cannot be less than 90% of the net property income received.

Would you mind sharing a link to the REIT so I can check it out?

Bostonerimus1 said:

I bought a two family home 25 years ago and rent out the one bedroom flat on the ground floor. The rental flat cost around $110k and I've rented it out for an average of $1600/month with very few empty periods. After taxes and expenses are taken into account my ROI on the initial purchase price from rent is 7% and the price of the rental has grown from $110k to $400k which is an annual capital gain of around 5%. The mortgage is now paid off so the rental is an easy way to generate reliable income. Rentals are long term investments and I would never have more than one and ideally would live on the premises and do management and repairs (when possible) myself.

I own a parking space which I rent out whenever possible. I think renting out property is a good idea if one has it. However beyond that I think funds are the way forward...

As with anything you have to make sure the numbers add up. I would not put rental property ahead of pensions or ISAs invested in main stream funds because of the tax advantages. A rental is something to consider once you have those investments well under control.

Johnjdc

Isn't the simple answer to the original question "because most banks won't lend you money to buy a REIT"?

Bostonerimus1

Mr.Generous said:

Depends on the returns and what the investors skills and preferences are.

A terraced house bought for £50k (10 years ago) now rents out at £650 pcm, a gross yield of 15.6%, the rent will rise each year. It has already repaid the purchase price and expenses in rent.

But as I own the asset I should also consider its current value. Approx £110 k.

How does it compare - say I'd invested the £50k in fund?

You have to put something aside for repairs, maintenance, tax and other expenses. You should budget between a third to a half of that rent for those

Bostonerimus1

FirstUser said:

In my experience, not everybody who is comfortable investing in a buy2let is comfortable investing in securities instead, the feeling being that domestic real estate is more tangible, in particular if one does the whole management oneself. I have spent years persuading a relative to diversify into shares, and they still regard it all as just another form of gambling even though their shares portfolio now clearly outperforms their B2L.

Similarly, not everybody who is sufficiently competent to run a buy2let portfolio is by default sufficiently competent to swith to a self-invested funds portfolio of at least comparable financial performance. REITs are among the riskier and less transparent instruments, and I would not look at them as a direct alternative to B2L for the reasons mentioned in the thread already: they behave quite differently as an investment vehicle compared to a B2L portfolio, so moving funds from B2L to the stock market what one shold ask oneself is: what are my investment objectives here, and how can I design a portfolio that achieves those objectives.

I would never give up the tax advantages of a pension or an ISA for a B2L. Pension and ISA should come first for most people. I would also never own more than one rental property as I like to self manage and two properties would start to be work and it would also lock up a lot of capital and break the rule of investment diversification. People with B2L mortgages who have to refinance could quickly get into trouble.

subjecttocontract

I stated buying BTLs in 1999. I've paid large amounts of tax, managed them myself as well as having a full time job for some of that time. I've now sold most of them and the total profits e.g net rents + capital gains means ive made around a £million profit. It's not so easy now......interest rates, adverse legislation, cost of living etc.

thegentleway

Johnjdc said:

Isn't the simple answer to the original question "because most banks won't lend you money to buy a REIT"?

Yep, surely the main appeal is leverage, i.e. being able to borrow against the B2L.

Albermarle

In my experience, not everybody who is comfortable investing in a buy2let is comfortable investing in securities instead, the feeling being that domestic real estate is more tangible, in particular if one does the whole management oneself. I have spent years persuading a relative to diversify into shares, and they still regard it all as just another form of gambling even though their shares portfolio now clearly outperforms their B2L

Yes, away from the confines of a savings and investments forum, many people feel they understand property ( they have their own in many cases)  but are completely befuddled/switched off from  investments in financial markets, and many are just plain suspicious about pensions.

On the famous TV property show 'Homes under the Hammer' the property buyers/small time developers often say 'this will be my pension' and the presenters encourage this view saying things like 'you can't beat bricks & mortar' etc

On a personal level we know a couple who did up large older houses in North London. Always to a high standard, big profit on each one and move on ( and live in ) the next one. Until one day they made a mistake in buying one, and then the market went weak, so double trouble. Final result, divorced, one bankrupt, the other in huge debt. No savings, no pension, living in small rented flats . Disaster !

Malthusian

Mr.Generous said:

Errr no. I paid £50k what the house is now worth isn't what I paid.

so 650x12 / 50000

Yield = annual income divided by what you could get for the asset today. £50,000 is ancient history. Might as well divide by the price of the bricks it was built out of originally.
Don't take my word for it, you can check Investopedia or any finance textbook you like.

I'm not going to do the exact maths, the rent started at £450 and worked its way up, but a year ago it reached £50k - my first renter to fully repay the purchase price in rent. So about £57k in rent to date.
I have spent a few £ on landlord insurance (ave about £100 a year) gas safe, elec safe and a few minor repairs and decorating. I probably put more time in than you would investing in shares, but I'd say they come out pretty even for a return. Both a pretty decent choice really, rather be on the "hows my investment doing" side of MSE than the alternative I guess.

So for the extra work over 10 years you have earned £26,000 compared to sticking it in a global tracker, or £2,600 per year. Minus tax (CGT on a £60k BTL gain will be somewhere between £10k and £17k, which is much harder to mitigate than with a liquid tracker fund). It's not a bad return by any stretch, it's just not making me want to become a landlord.