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  • FIRST POST
    • wildmushroom
    • By wildmushroom 7th Aug 18, 11:49 PM
    • 2Posts
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    wildmushroom
    Investment & rent or shared ownership (in London)
    • #1
    • 7th Aug 18, 11:49 PM
    Investment & rent or shared ownership (in London) 7th Aug 18 at 11:49 PM
    Disclaimer: Utter newbie here and stumped but willing to learn, just a bit overwhelmed.

    Put simply - I have saved a good chunk (40k ish) that I was intending to use as a deposit for a flat on shared ownership in London. However and re-considering whether it is more worthwhile to rent and invest that saving instead (single 23yo professional).
    I realise this is a well debated topic, but which ultimately is specific to each situation so hoping someone can at least give pointers on where to look - anything appreciated so I stop letting it all rot in a bank account as is. Some wild and likely unhelpful thoughts of mine below.

    ------------------------------

    My own views were:

    Shared Ownership
    Pros
    1. 25-50% share Iíll get back from the mortgage side (as opposed to 100% 'loss' in rent)
    2. Likely cheaper than renting (just) even including rent/service charges
    3. London housing market = fairly good prospect of upward increase in value
    Cons
    1. No full rights (ie can't have pets, can't sublet, can't do work)
    2. Restricted market (ie cannot sell on open market - possibly lower value increase as a result)
    3. Would not be for very long term given affordability only really being an okay place - meaning would likely want to upgrade in e.g. 10y
    4. Difficult to find / get hold of - would be in 1-2 years at earliest anyway

    Rent & Invest
    Pros
    1. Flexibility in terms of living and liquidity
    2. Likely much higher rate of return on investment
    3.Overall may save more money

    Cons
    1. Probably higher risk
    2. Likely more expensive monthly and all is 'lost' to landlord
    3. Limited knowledge so would need to research more about appropriate funds etc to DIY (not sure what's most viable for me given it's a lot of money but in grand scheme of things not very much to professional advisors etc!)

    I have tried to do a quick calculation of which might be more 'profitable' so to speak after 10 years but tbh I made so many assumptions on very limited data I could find I think it's largely useless
    (cannot post a link but essentially using figures for a £400k flat; £40k deposit; £100k mortgage and reckoning a 1/2% value increase; vs investing the £40k mostly in a lower risk fun making 7% a year and the rest (1/3) in a higher risk hopefully bringing 11% yearly).
Page 1
    • cashbackproblems
    • By cashbackproblems 8th Aug 18, 12:36 AM
    • 1,792 Posts
    • 699 Thanks
    cashbackproblems
    • #2
    • 8th Aug 18, 12:36 AM
    • #2
    • 8th Aug 18, 12:36 AM
    rent and save for your own place maybe further out, what is your total budget? 40k deposit and I'm guess you earning 30-40k probably won't let you borrow much.
    • bowlhead99
    • By bowlhead99 8th Aug 18, 8:58 AM
    • 8,307 Posts
    • 15,197 Thanks
    bowlhead99
    • #3
    • 8th Aug 18, 8:58 AM
    • #3
    • 8th Aug 18, 8:58 AM
    I have tried to do a quick calculation of which might be more 'profitable' so to speak after 10 years but tbh I made so many assumptions on very limited data I could find I think it's largely useless
    (cannot post a link but essentially using figures for a £400k flat; £40k deposit; £100k mortgage and reckoning a 1/2% value increase;
    Originally posted by wildmushroom
    When considering a flat as an 'investment' whose market value rises over time, much of the return comes from the fact that some of the growth in value is not on the money you invested (£40k) but on the £100k which you borrowed.

    In your case the invested borrowed money is 2.5 times the amount of the invested deposit so that the total tax-free capital gain when you sell it is 3.5x what it would have been if you just invested your £40k cash without a mortgage. So if the property goes up in value by 10%, you get a 10% profit on the £140k not just on the £40k, and make 14k (not 4k) on your initial 40k investment. That's before deducting the costs of interest on the loan but at the moment, rates are quite low.

    This 'gearing' or 'leverage' effect is very useful and is one of the reasons why investing in your own home can be more lucrative than investing in the stock market, even if property prices do not go up as much as the stock market.

    Obviously there is also the saving in rent, compared to renting on the open market. But you are looking at shared ownership, so you will still be paying rent (on well over 50% of the property) and if you are buying a 400k new build instead of a 'normal' 1-bed non-new build flat, there may not be much of a rent saving against what you would pay in a cheap flat on your own or a shared rental house.

    vs investing the £40k mostly in a lower risk fun making 7% a year and the rest (1/3) in a higher risk hopefully bringing 11% yearly).
    You should totally recalibrate your expectations here because a lower risk fund won't be making you 7% a year (more like inflation plus 0-2% if you're lucky); and 11% yearly is optimistic for a higher risk fund over the next five years.

    Since the last major crash in 2008, the markets have been going upwards for pretty much all your teenage and adult years (plus a big sterling depreciation in the last two years); so if you look back at a 5-10 year chart for higher risk equity funds they will show nice results. But those results are higher than the long term expectation, because they don't include a massive periodic crash, and instead show the effects of world governments relaxing their central bank policies (quantitative easing and low interest rates) to try to get out of the hole from the last crash, boosting asset prices.

    So, the long term expectation is not really 7-11% and even if it was, it shouldn''t be your short to medium term expectation when starting from the top of a market rather than bottom or middle of a market. There is a 30-60% crash on equity funds to factor in at some point (70-80% on the higher risk funds).

    Most of your pros and cons make sense but you need to be realistic in your figures.


    With a property purchase, the gearing effect is useful and you do need a roof over your head so it can make sound financial sense to keep the profit (especially on the borrowed money which is not even your money) for yourself, rather than give it to a traditional landlord. However, there are some big one-off costs with buying and selling and so if you are only looking at it as a short term thing for a few years it can be very inefficient and wipe out some of the gains (if there even are any gains - just like the stock market, nobody really knows what the London property market will be doing in three or four years time).

    With hindsight, people buying a few years ago didn't need to worry so much about the buying costs or selling costs or interest rate costs because they got lucky and property went up and interest rates stayed low. But taking anecdotes from people who have bought a few years ago is like looking back at a stock market chart and seeing it all going up nicely for the last five years and using that as a basis for your decision. Their experience is unlikely to be same as your experience.



    In your shoes I would be tempted to keep building the deposit and not dive into buying a 35% share of a £400k flat. One key point is that as a 23 yr old young Londoner passing through the early stages of a career path you would expect inflation-busting pay rises as you go up through the ranks in the years to come, because you aren't just getting paid more for extra cost of living with inflation, you're getting promotions. The most junior graduate in the office typically doesn't get paid anything like the same as a 30 yr old manager, and so if you leave it a few years you will find that the salary which only supports a £100k mortgage now will support a much better one in the future; which means owning more than 35% of whatever flat you end up in.

    The other major negative is the loss of flexibility in your career from buying a shared ownership flat that you can't sublet. Being in the right place at the right time with the right personal circumstances can be very career enhancing.

    Example: what happens when you can't take that job or secondment outside London or overseas which comes up, because you can't afford to both keep paying the mortgage on the flat and rent in a foreign city for a year or two, and all your savings have been blown on a flat deposit so you have no ready cash to help with a move? Or you want to move to some country with high quality of life and low costs, with correspondingly low salary, but have a monthly pounds sterling mortgage expense and a big loss if you try for a quick sale on the flat?. The career enhancement from making the right move at the right time can be worth hundreds of thousands over the course of a career. So, committing your cash and your self to settling down into a property before you're 25 may close some doors, unless you can make sacrifices to keep them open.

    So, in your shoes I probably wouldn't grab for the absolute lowest rung on the property ladder that I could see, and throw everything at it. I'd agree with the poster above to bide your time and build the deposit further to make a bigger jump later, supported by a bigger salary and bigger deposit (and who knows, maybe a partner too).

    However, I wouldn't invest the whole £40k. You were talking of investing a third in high risk to hope for a high reward and investing the rest in something lower risk. Whereas if you are looking to ue the money in the next 5-7 years, people will tell you investments are not suitable. Would you really not mind if your deposit had fallen 40% from its peak just as you reached the year you were hopefully going to pull the trigger on buying a property?

    As 'lower risk' investments are not amazingly lucrative at the moment and still carry risk of losses, I would keep at least £20k of the £40k in cash - which is not so much that you can't get decent interest rates on it by shopping around for all the top current accounts, regular saver accounts etc. But I have a a high risk tolerance - many people would say the cash element of your deposit savings should be at least 75%+.

    Investments outperform cash in the long term but from year to year they can vastly outperform or underperform. You only reach the long term expectation by being in it for the long term - an economic cycle or two, ten to fifteen years plus. Whereas three to five years is a complete coin toss, you might get four downward years and a sideways year and no up years. As you're probably not going to want to wait 10-15 years for your property purchase, putting all the money in investments doesn't seem appropriate. Sure, if you have a gambling streak you could put a few thousand in something higher risk, which can still provide some excitement but without risking your deposit.
    Last edited by bowlhead99; 08-08-2018 at 9:01 AM.
    • fiisch
    • By fiisch 8th Aug 18, 10:02 AM
    • 341 Posts
    • 193 Thanks
    fiisch
    • #4
    • 8th Aug 18, 10:02 AM
    • #4
    • 8th Aug 18, 10:02 AM
    I read your post and had already formed a truly brilliant, eloquent reply that would have really opened up your mind to the various possibilities.


    Then I read Bowlhead99's brilliant reply and thought better of it - excellent points and 100% agree.


    Shared ownership (particularly if not the 80/20 Help To Buy scheme) has it's pitfalls - you have no control over the rent being increased, and it's not straightforward to sell (house selling/buying is stressful and complicated enough).


    At 23, that's a solid amount of savings, and outside of London you'd easily get onto the property ladder. However, your 20s are massively turbulent in terms of change - who knows where you might wish to live in 1, 2 or 5 year's time?


    Personally, I'd follow previous poster's advice to the letter...
    Save £6k in 2018: £1651.19 / £6000
    • wildmushroom
    • By wildmushroom 8th Aug 18, 10:41 PM
    • 2 Posts
    • 0 Thanks
    wildmushroom
    • #5
    • 8th Aug 18, 10:41 PM
    • #5
    • 8th Aug 18, 10:41 PM
    ...
    Investments outperform cash in the long term but from year to year they can vastly outperform or underperform. You only reach the long term expectation by being in it for the long term - an economic cycle or two, ten to fifteen years plus. Whereas three to five years is a complete coin toss, you might get four downward years and a sideways year and no up years. As you're probably not going to want to wait 10-15 years for your property purchase, putting all the money in investments doesn't seem appropriate. Sure, if you have a gambling streak you could put a few thousand in something higher risk, which can still provide some excitement but without risking your deposit.
    Originally posted by bowlhead99
    This is awesome - thank you so much for writing this all and it makes a lot of sense. I'll have to spend a bit more time doing some research and hunting down some shorter term options (I currently have an account paying 1% on the first £20k so whilst not big there is that - the rest is just sitting there and I'd hate to not at least try something with it. I've heard a little about short-term bonds or P2P so will have to do some digging before doing any of that.

    ...
    Shared ownership (particularly if not the 80/20 Help To Buy scheme) has it's pitfalls - you have no control over the rent being increased, and it's not straightforward to sell (house selling/buying is stressful and complicated enough).
    At 23, that's a solid amount of savings, and outside of London you'd easily get onto the property ladder. However, your 20s are massively turbulent in terms of change - who knows where you might wish to live in 1, 2 or 5 year's time?
    ....
    Originally posted by fiisch
    Thanks also muchly :-) I agree - it looks difficult to get into, I think I'm just morally a bit stubborn on the idea of renting in comparison! But as you say it's probably worth a rethink.
    Appreciate it!
    Last edited by wildmushroom; 09-08-2018 at 8:13 PM.
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