BTL in 2011 - worth the hassle?

[GreenerGrass]

Assuming the bears are right and property starts to dip again in the autumn, 2011 is looking like the optimal time to purchase BTL property. But these rental arrear rates are pretty shocking (in contractoruk news):

In its poll of 500 landlords, the research agency found that less than a fifth suffered rental arrears in March 2008, compared with almost one in three 15 months later.

More than a third were forced to cover the cost of non-payment of rent from their tenants' deposit, and nearly as many (32%) have taken eviction against their tenants.

From friends and relatives who have been doing BTL for years I get the impression the "vetting" carried out by agencies is next to useless, with tenants via agencies no less likely to end up trashing the house or getting behind on rent. You may as well advertise direct and save giving a % cut to these parasites who add no value.

[BlasterBates]

I find having shares is easier, sometimes they don't pay their dividends which I find annoying, and one manager trashed a company I owned but he was sacked.

[MrNoMotivation]

just keep going up the property ladder buying bigger houses.
You get the enjoyment of a big house but then when you retire you down size to a nice bungalow.

[DieScum]

I find having shares is easier, sometimes they don't pay their dividends

It's the leverage which really makes it for property though.

I know you can leverage shares but that is really risky whereas because property is naturally more long term and you're locked in the leverage isn't so bad if everything starts going wrong.

[BlasterBates]

got me thinking there, provided you have a longterm serviceable loan on your shares the risk would be the same. The only thing that makes the lending risky on shares is simply that it is short term.

hmmmm

The average return on shares is about 10% and on a house a few percent lower. But this average return only works over the longterm and if you invest over time, or just shove it all in during a crash.

No doubt shares are volatile I was about 50% down after the crash. However if you hold money back which you can shove in after a crash you recover this pretty quickly. I would call this a "crash" fund. I learnt this painfully after the Asian crash.

[mace]

It's the leverage which really makes it for property though.

I know you can leverage shares but that is really risky whereas because property is naturally more long term and you're locked in the leverage isn't so bad if everything starts going wrong.

Yep don't leverage shares. I lost thousands on CFDs in the last recession.

[MrNoMotivation]

Read J.K. Galbraith's book on 1929 if you want to find out why not...

you don't need to read a book about it. It sounds like a silly idea anyway.

[expat]

Property values can fall, but share prices can and do fall to zero. The downside in property is limited; you can of course limit the downside in shares but that costs and so the return is not so good.

Also, the long-term return on shares is purely historical, there is no reason to think it will continue, whereas with property there is reason to.

There are several reasons to think that shares may not continue to perform as well as they have done, including:

• Most historical data on share prices covers a period when few people invested in shares, few saw them as a "safe" investment, and so they carried a "risk premium". It is suggested in some quarters that this is no longer the case.
• "Survivor bias": shares that collapsed and companies that went bust do not appear in long-term data because they're not there any more. Neither is your money, if you invested it in any of them. There are many such companies: few companies live as long as their shareholders.
• Most shares are now valued too high, because the baby boomers started to invest in them (directly, and through their pension funds). Now they are starting to retire, and they will want to divest themselves of this to fund their retirement. Demand for shares has boomed and will now bust.

There is also the importance of how you invest in shares. Most of us tend to overestimate our ability to pick stock, and not diversify enough. Warren Buffet did say that you only have to diversify if you are no good at picking stocks, Well, I'm no good, and neither are most of us.

Recent studies show that most shares lose money. About 75% lose money, but the remaining 25% make more than 3 times as much as the dogs lose. So you must be invested in the 25% of good shares, either by picking them or by diversifying enough that you hit all the targets; or you will lose.

Having said all that, property and especially tenants can give you a level of grief that the market can't touch. You invest, you watch a little, and you get on with your life.

[TimberWolf]

Also, the long-term return on shares is purely historical, there is no reason to think it will continue, whereas with property there is reason to.

Isn't part of the reason for historical house price rises linked to the growing population density?

[BlasterBates]

..a share can go to 0, but the Dow Jones or FTSE has never gone to 0.

Shares don't go to 0 overnight they just dwindle downwards gradually, at the same time other shares will be overperforming. If you have a 30 shares, then at least one of these shares will probably dwindle downwards to virtually nothing, but it still won't affect your performance.

I have 2 or 3 in my portfolio that are 90% down but then I have 2 or 3 that are up several hundred percent up. All balances out in the end and you'll find your performance is pretty close to the indices, even with the dogs, if you're diversified.