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  • Stickies & Evergreen

    BTL vs. Shares - has the pendulum swung?

    ``buying in at the peak is the killer of all investments``

    I would say for property , buying at the peak is a bit of  a downer yes but def not a killer

    Property presents  opportunities that the other asset classes don`t

    100K property bought for 100K @ peak

    End Year 1 prices dip 4% so now worth 96K    Net  cash flow though in rent  = 4K

    Maybe 4% dip the 2nd year as well . You are still ok as you have another 4K rent

    You are just treading water. You are just biding your time .

    Then Year 3  you may have 3% growth and year 4 another 3% growth

    With your rental income a good refurb adding value and capital growth it feels real good

    Then 5% year 5  and you may  have like I did the odd  glory year with  12% growth in 2016 .

    With 75% leverage you are on a real high .

    Because thats 48K growth on your original 100K investment

    That`s almost 50% ROI

    Property can ride the troughs in negative capital growth years  with no real harm done 

    Then once in a while you get the glory years to make up for it and some

    That`s why exposure is more like: 

     89% Property 

     10% Cash 

     1% Shares


    Jonathan Clarke. http://www.buytoletmk.com

    Agree with you here that it should be a downer rather than a killer if the plan is to buy and hold for the long term.

    Perhaps where it could be a killer is where things stand when you come off your fixed rate.

    So a scenario where prices have dropped and because you're highly leveraged originally,  your LTV is even higher after a price drop and therefore too high to remortgage onto a new fixed rate.

    So you'd be trapped on an SVR, but possibly at a time when interest rates have gone up making said SVR very expensive.

    I'm sure you've built a contingency fund for that as I have because we've been in the game a long time,  but I fear for the guys just starting out with high leverage and little cash.

    What would your advice be to them?


    Yes I agree there are potential scenarios where multiple factors could go against you all at once

    Price drops, rate rises, boiler goes , lose your job etc . The perfect storm of negatives

    So covering this would be down to ones own risk profile , exit strategy  and contingency fund

    I favoured 5 yr fixes so I had plenty of time if required to taking counterbalancing action

    For 3 years I didnt worry too much .

    Year 4 it was flagged up in my brain and Year 5 you acted accordingly to mitigate risk as appropriate

    That may mean increasing contingency  or perhaps  not buy so aggressively for a couple of years

    My stress test loan pay rate hovered around 8% and my contingency fund around 5%

    I felt comfortable with those percentages

    MA of 118 I recall recommended  a 20% contingency fund on debt  .

    I argued against that as being too high

    so I saw it as our risk profile being different and there is nothing wrong with that

    20% contingency would make him 99% bullet proof against all the negative scenarios arising you mentioned

    Say you had 1 mil loans it would mean you have 200K in the bank standing still just in case

    Yes that would cover you if you were 85% LTV and  prices dived 15% and rates rose 5% but personally I would have bought maybe 5 more houses with that cash at the time. So its a judgement call for those starting out with high LTV as to getting the balance right - for them  .

    A) Too cautious  then you miss a trick and are not maybe a full blown  property `entrepreneur`.

    B) Too reckless though and you earn the title of a failed businessman

    The line can be fine and circumstances outside your control could decide on the A or B

    When i looked at contingency funding I took a wide view on it . The worst case was if I sold up would I survive . And bearing in mind I was 85% LTV at peak the answer was always yes . 15% drop in prices is rare and that was my stake . I had a steady job so i would just carry on as if I never had started . Yes very annoying as my stake would have been lost but I would have 20 years to recover and rebuild. That probably would have meant  20 years more of sticking with the day job . I was also fortunate  in the family support structure so the bank of mum and dad would have no doubt rushed to my aid if things ever got really sticky.

    If there is little  family support structure and your job is not that great and redundancy is a possible and you got expensive car loans and you like 3 holidays a year and you or partner are high maintenance  - then yes tread carefully with high LTV. Do it yes but just slowly and surely until you have that equity cushion or/and know what you are doing so failure is not an option

    I encourage my kids to get stuck in ( in other fields) . They like me  can afford to push the boat out with a certain confidence and aggressiveness as they have the unsaid reassurance that I`ve got a lifeboat tucked away in my garage for them  -

     just in the unlikely event it all goes a bit wonky


    Jonathan Clarke. http://www.buytoletmk.com

    The Share Centre- That gives you a clue the way they think. Don't need to read the article so see where they are coming from.