Investing in property, but not going to SPV route

[ChimpMaster]

This ^^^.....all day long....

I must work with 25 Ltd contractors. Property investing seems to be a religion for a lot of them. I see them bending over backwards to make it work, mortgaged to the hilt. Some have. Normally those that can cashflow their next purchase outright from accumulated rental income.

Investing in any cyclical asset class works at the right point in the cycle. In my opinion, with property, that point is not now.

I don't like it as an investment on a small scale and certainly don't like it as a business on a small scale with a narrow geographic focus. It's illiquid, with high transaction fees and it involves a host of variables between your tenant's wallet you and your own. Putting the properties inside a company adds a couple more. I appreciate that I'm talking of a rental business and not a buy and flip one. Perhaps with a specific practical skillset at your disposal and a bunch of sweat equity, buying and flipping is a more workable model.

My preference is to hold property investment trusts with long track records of healthy yields (some of which are presently trading at significant discounts to NAV) bought with my own money as part of a diversified portfolio inside a SIPP or ISA that you don't even have to declare to the tax man and avoid the gymnastics described above. Is it boring? Perhaps. Will it make you rich overnight? No. But it has a proven track record of doing so over any appreciable timeframe.

Horses for courses. I don't disagree with investing in shares or funds but the UK stock market is probably the worst of the first-world markets, it really is the sick market of the world in my view. I lost money that never came back (for example, banking shares in the 2008 crash), so I stay clear of it. You have to buy in 100% cash, and dividends run at around 4% to 5% on average. You need £1m+ to generate an income of £50k, with significant risk to your initial investment. But some can make it work.

Property takes a lot more effort, for sure, but has significant advantages too. You can leverage a big part of the investment with a very cheap loan, and have that loan repaid over time by income from rentals. In the long term, you gain an asset that has not only been largely paid for by the rental income, but has very likely appreciated in price too. In many cases you can release equity to get your initial investment back out, in effect making your returns infinite. You'd have to hit some seriously home-runs on the stock market to achieve the % gains anywhere close.

Even if you consider just one or 2 properties, rented out long term to (say) a housing association or to the local council (almost like a FIR lease, so minimal management needed), it'll be a nice nest-egg for your later years.

I do agree that property investment is better on a medium/large scale (meaning within the confines of our ability i.e. like 5 to 10 properties etc). You can then build up a business model around it and generate sufficient income to not have to worry about working/contracting in IT any more.

Also agree that it isn't a great time to be buying property. The problem is that yields are so long everywhere else, unless you are willing to significant risks. Even today a very simple BTL can give you 5% without much effort, and that's if you buy a property cash, for example £1000 rent on a £240k flat. If you leverage via a mortgage then your ROCE will be even greater: for example, put down £60k and mortgage the £180k on a £240k flat, meaning profit of (£12000 rent - £5400 loan interest) = £6,600 each year i.e. an 11% return on your £60 deposit. Simplistic numbers but you get the idea.

[Lance]

Horses for courses. I don't disagree with investing in shares or funds but the UK stock market is probably the worst of the first-world markets, it really is the sick market of the world in my view. I lost money that never came back (for example, banking shares in the 2008 crash), so I stay clear of it. You have to buy in 100% cash, and dividends run at around 4% to 5% on average. You need £1m+ to generate an income of £50k, with significant risk to your initial investment. But some can make it work.

Property takes a lot more effort, for sure, but has significant advantages too. You can leverage a big part of the investment with a very cheap loan, and have that loan repaid over time by income from rentals. In the long term, you gain an asset that has not only been largely paid for by the rental income, but has very likely appreciated in price too. In many cases you can release equity to get your initial investment back out, in effect making your returns infinite. You'd have to hit some seriously home-runs on the stock market to achieve the % gains anywhere close.

Even if you consider just one or 2 properties, rented out long term to (say) a housing association or to the local council (almost like a FIR lease, so minimal management needed), it'll be a nice nest-egg for your later years.

I do agree that property investment is better on a medium/large scale (meaning within the confines of our ability i.e. like 5 to 10 properties etc). You can then build up a business model around it and generate sufficient income to not have to worry about working/contracting in IT any more.

Also agree that it isn't a great time to be buying property. The problem is that yields are so long everywhere else, unless you are willing to significant risks. Even today a very simple BTL can give you 5% without much effort, and that's if you buy a property cash, for example £1000 rent on a £240k flat. If you leverage via a mortgage then your ROCE will be even greater: for example, put down £60k and mortgage the £180k on a £240k flat, meaning profit of (£12000 rent - £5400 loan interest) = £6,600 each year i.e. an 11% return on your £60 deposit. Simplistic numbers but you get the idea.

You've identified what it is about property that works. Easy access to credit so you can leverage your investment. Anybody can do it.

You say £1M in stocks and shares get's you £50k. Fine.
£1M in property (4 houses at £250k each) get's you £50k in rental income. Also fine.

Property is more effort. Shares are more risk.
The main difference though is that banks will lend you money for the property.
It is possible to borrow money to invest elsewhere but unless you work in finance (EDIT: I don't mean as an IT contractor) good luck getting that.

[ChimpMaster]

You've identified what it is about property that works. Easy access to credit so you can leverage your investment. Anybody can do it.

You say £1M in stocks and shares get's you £50k. Fine.
£1M in property (4 houses at £250k each) get's you £50k in rental income. Also fine.

Property is more effort. Shares are more risk.
The main difference though is that banks will lend you money for the property.
It is possible to borrow money to invest elsewhere but unless you work in finance (EDIT: I don't mean as an IT contractor) good luck getting that.

£1m of property can be bought with just £250k of outlay. Personally I don't go beyond 60% LTV, but that's just my risk profile. And the loans would be paid off over time by rental income, and of course you would expect (hope for) asset price inflation.

I have leveraged to buy shares before (well, derivatives) but I have always lost money, hugely. The risk is far too great ...and the loan can't be paid off by tenants!

[eek]

£1m of property can be bought with just £250k of outlay. Personally I don't go beyond 60% LTV, but that's just my risk profile. And the loans would be paid off over time by rental income, and of course you would expect (hope for) asset price inflation.

I have leveraged to buy shares before (well, derivatives) but I have always lost money, hugely. The risk is far too great ...and the loan can't be paid off by tenants!

Continued asset price inflation from today's prices?

[ChimpMaster]

Continued asset price inflation from today's prices?

See post above: Also agree that it isn't a great time to be buying property.

But still, if you are have cash in the bank then you have to put it to work somewhere at some time. Right now, I have no idea, but I will bide my time to see how the economic crisis unfolds next year. It's really interesting watching inner London prices coming down, and I reckon they have another 20% to fall yet, unless rents go back up.

I really need to get out there more, network, share ideas, go into partnerships etc.

[Paralytic]

The risk is far too great ...and the loan can't be paid off by tenants!

You need a bigger baseball bat.

I'd not be buying property just now either, unless it was for a home I planned to stay in for a good number of years, not as an investment.

[sludgesurfer]

As you say, there's no right or wrong. I do however see some property zealots blinkered by home bias. i.e. they dismiss the stock market solely based on FTSE 100 performance (excluding dividends) and extol the virtues of property based on solely on UK property prices often with a strong regional bias.

I see several of my fellow contractors ignore some of the (admittedly few) remaining tax benefits sitting under their noses in pursuit of some passive property income dream. They'll dick around with legally and ethical questionable practices like trying to convince their accountant to put their caravan through the company or take a £50k BBL to "invest" in premium bonds and such like without even considering the use of simple tax avoidance steps like a personal pension or using their ISA allowance.