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Hoping you can help with a bit of a dilemma I am having at the moment with decisions on what investment approach to take.
Firstly, a bit of background on my situation:
- i currently jointly own a residential property that I live in at the moment with my partner. It is mortgaged but has grown in value quickly over the past two years of ownership
- between me and my partner we are able to save around £32k per year based on our current earnings
- my mother-in-law is a successful financial advisor
- I am a letting agent so have reasonable knowledge of what is required to manage rental properties
With interest rates where they are at the moment, it clearly makes a lot more sense to invest rather than save. My preferred idea is to buy one high-yielding HMO property every year for the next few years and build our cash flow up. I have found a couple of areas where they are around £100k for a 4 bed house with rental returns of around £1200pcm. I can manage them myself so would just need to pay let only fees.
However, my mother-in-law strongly disagrees and suggests that it makes a lot more sense to invest in stocks and shares and paying off our residential mortgage especially since the recent tax changes in the BTL market.
I would usually just do what I think is best but as she is a successful financial advisor I don't want to just disregard her views.
I appreciate that I am coming and asking for advice on a portal dedicated to property investment so the advice may be a little bit biased but would love to hear your thoughts!
Thanks in advance
As most answers, it depends.
Are both of you near the higher tax band? If yes, how do you intent to structure it to be tax efficient.
For example, when I do my joint ventures, it's bespoke. Lower salary earners prefer properties with high yielding returns. Higher income earners stays away from property and do stocks and shares with minimal taxation if structured properly. I am generalizing here to just give you am example. It has to be individualized plan.
Essentially, in general, stocks and shares are more tax efficient, and property is taxed heavily. But both can make a good investment if structured well.
Taxation is something I have looked into a little bit but I definitely do need to do more research on. Thanks for the advice.
Just some figures from my investments
Stocks and shares via SIPPs, LISA and ISA. Net about 6% average after management and platform fees. Some cash top up (claim back) from government like pension and LISA contribution. Net take home about 7% (dividend and growth). Just on tracker funds, no skill, work or experience required. Very liquid funds. No tax.
Properties rental and capital growth netting about 19% before SDLT, S24, income tax and CGT. Take home about 9% net, but a lot more work, skill and experience involved. Not very liquid.
Just about personal choice and circumstances.
You out line the predicament I have with BTL
6% tax free is worth around 9% after tax on BTL
and you don’t have to lift a finger
I am sitting here on holiday dealing with a repair problem in the uk
its not hard to solve but it’s still takeing time
on the other hand just checked my pensions and ISA and I made money tax free with little input
my own feeling is when you have what you want maybe other investments should be concidered
Learn Change and Adapt ?????
All comments are for casual information purposes only. If you wish to rely on any advice I have given please ensure you obtain independent specialist advice from a third party. No liability is accepted for comments made.
Hi Tom and welcome to the tribe.The great thing about property investment, is that it is relatively simple to understand and you already have experience of some of the processes through buying your own home.Stocks and shares are harder to understand imho and they do not enjoy the same benefits as property i.e. two potential income streams - cash flow and capital growth.An investment property is something you can touch and feel and improve through refurbishment. No something you can do with stocks and shares.So property all the way for me, although you could hedge risk by investing in both property and stocks and shares to diversify your investment portfolio.The one thing I would caution you on is going down the HMO route. HMOs are typically the domain of experienced and hands on landlords. In some areas, there is also an over-saturation of HMOS. See - Concern over investors being sold HMO dreamI would never advise a newcomer landlord to start with HMOs for that reason.I would strongly recommend that you go for a two or three bedroom house in a good street within a 15 minute radius of where you live, with close proximity to transport links, and in a good school catchment area.These kind of properties are the work horses of the private rented sector. They are low risk because they rent out all day long and families tend to put down roots while the children are in school, so you have less turn-over of tenants.To reduce risk further you could consider buying a property that is already tenanted.See - Benefits of buying a tenanted propertyI hope that assists in bringing clarity to your direction?
Vanessa Warwick Landlord and Co-Founder of PropertyTribes.com **If you have got value from Property Tribes, find out how you can support it in remaining a free to use community resource**
Thanks for the response.
The problem with looking 15 minutes from where I live is that 2/3 bedroom houses are anywhere from £300-£450k and are renting for between £1100 and £1400pcm which to me doesn't seem like a great yield compared to other parts of the UK. Plus it would be a case of buying a new property every 2 years instead of yearly.
My thoughts were to look to get into the student market around Hull university where prices seem to be cheap and yields high.
Regarding stocks/shares vs. property investing, I agree about the two forms of return in terms of rental yield plus capital growth. My other argument would be that you can use gearing to maximise your returns. My mother-in-law has the following concerns though:
1. Placing all your eggs in one basket - with investment funds you can spread your risk across companies/countries/sectors etc. Buying a few houses in one area and one sector leaves you vulnerable to policy changes and unforeseen problems e.g. new roof, terrible tenants etc.
2. Hard to get your money out of property if you need it quickly
3. Growing forecasts of property market crash in next 2/3 years. Why not invest in stock market for now, wait for a crash and then buy up property when market is low?
4. Time and effort - why go through all the hassle and stress of buying a property, renting it etc when you can just invest in index funds and leave it be for a long period of time?
Taxation as mentioned by JLASSET is also something I need to look at further.
These all seem to be good points and make me fairly conflicted!
Again, I warn you against theoretical yields. "Prices cheap and yields high" is theoretical and the reality may be very different. I really suggest you read the thread I linked to about concerns over HMOs. More and more people are being sold an HMO dream, only to find it is really a nightmare.
I see BTL as a job
I see pensions and isa and unit trusts as an investment
BTL gives me the cash to have investment just like any other job
BTL can be stressful and if it goes wrong in the early years you can lose the lot
I never worry about investments but there have be worries over the past three years with BTL
if you wish to see the worries look at s24
none of ever dreamed it could happen
but it can
I think today there is room for diversification
Hi Vanessa - may seem a silly question but in your view does it matter if the houses you are advising to invest in are semi detached?
No question is silly if you are seeking to learn. Historically, terraced and semi-detached homes have performed better for capital growth purposes and tenant demand than detached ones. Hope that helps?