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Property vs Passive

Covering Market, Trends, and Practical (but see LEMON-AID for Building & DIY)
DelayedInvestor
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Property vs Passive

#301567

Postby DelayedInvestor » April 18th, 2020, 3:48 pm

Hi,

I periodically wonder if investing in property directly is something I should look into but I have always tended to discount it due to risk and time consumption.

So, the question I'm going to ask here is how do you, with experience of buying/letting/selling property, feel it compares to just putting your money in index trackers or a even a diversified collection of REITs if you want to stick with property?

It seems to me from various sources that it is very time consuming. Do you tend to find that you get a good return for time spent? For instance, if you just put your money in trackers and used the time to work extra hours in your main job or perhaps get adhoc work on the side instead would you achieve better or worse results?

I know one advantage of property is that you can get interest only mortgages which will definitely improve your yield but it seems like a massive increase in risk. The way I was thinking about it was: suppose you could get 5% yield on a property and had an interest only mortgage with a rate of 3% on half of the value of the property you'd now be getting 5% + (5% - 3%) = 7% yield. So whilst 2% is a good improvement the risk you're taking with either a rise in interest rates and/or a fall in value seems very substantial. Have I misunderstood something here?

Cheers.

James
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Re: Property vs Passive

#301582

Postby James » April 18th, 2020, 4:49 pm

I'm an accidental landlord with one flat in an apartment block that is relatively easy to let. There's a bit off faffing now and again when something needs replacing/fixing or tenants move, but on the whole not too time consuming. But it does require some input.
Shares tend not to ring you up to say there's a leak somewhere or the washing machine isn't working.
I make c. 7% yield on the capital I have in the place and bought it so long ago that it has a margin of safety I'm comfortable with.
Not sure I'd go into it intentionally now, however. If life ever returns to normal, I'll probably sell it and invest back in stocks. Up till this year they'd been doing better than the flat.
For the foreseeable future, however, all bets are off.

DelayedInvestor
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Re: Property vs Passive

#301622

Postby DelayedInvestor » April 18th, 2020, 6:38 pm

Thanks James. Interesting input.

True enough about all bets being off at the minute.

colin
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Re: Property vs Passive

#301624

Postby colin » April 18th, 2020, 6:55 pm

DelayedInvestor wrote:Hi,

I periodically wonder if investing in property directly is something I should look into but I have always tended to discount it due to risk and time consumption.

So, the question I'm going to ask here is how do you, with experience of buying/letting/selling property, feel it compares to just putting your money in index trackers or a even a diversified collection of REITs if you want to stick with property?

It seems to me from various sources that it is very time consuming. Do you tend to find that you get a good return for time spent? For instance, if you just put your money in trackers and used the time to work extra hours in your main job or perhaps get adhoc work on the side instead would you achieve better or worse results?

I know one advantage of property is that you can get interest only mortgages which will definitely improve your yield but it seems like a massive increase in risk. The way I was thinking about it was: suppose you could get 5% yield on a property and had an interest only mortgage with a rate of 3% on half of the value of the property you'd now be getting 5% + (5% - 3%) = 7% yield. So whilst 2% is a good improvement the risk you're taking with either a rise in interest rates and/or a fall in value seems very substantial. Have I misunderstood something here?

Cheers.

Sounds good if you acheive the figures stated, but the insurer may demand that you use a professional letting agent who will take a cut of the 5% and pay vat on top of that, you will have to pay income tax on the income without being able to offset mortgage interest against profit, but over a long enough time period you may have a capital gain which would be leveraged to the full value.

JohnW
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Re: Property vs Passive

#301662

Postby JohnW » April 18th, 2020, 10:54 pm

You really need both the tracker and the direct property for better diversification, but since you're only considering one it would have to be the glboal tracker in view of the substantially greater diversification you would achieve, and that's with a big 'S'.

DelayedInvestor
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Re: Property vs Passive

#301676

Postby DelayedInvestor » April 19th, 2020, 12:25 am

JohnW wrote:You really need both the tracker and the direct property for better diversification, but since you're only considering one it would have to be the glboal tracker in view of the substantially greater diversification you would achieve, and that's with a big 'S'.


So it's interesting to me that you'd think having the direct property would increase diversification. Having a single property seems like it would be the opposite of diversification. Surely a better way to invest in property in a diverse manner would be through REITs?


colin wrote:Sounds good if you acheive the figures stated, but the insurer may demand that you use a professional letting agent who will take a cut of the 5% and pay vat on top of that, you will have to pay income tax on the income without being able to offset mortgage interest against profit, but over a long enough time period you may have a capital gain which would be leveraged to the full value.


Yep, the hidden costs involved in owning property are another thing that would put me off. As far as the leveraging goes, I wonder if you could achieve a similar risk/return by spreadbets or derivatives on property stocks?

richlist
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Re: Property vs Passive

#301698

Postby richlist » April 19th, 2020, 8:44 am

Seems to me you are only talking about yield. There are usually 2 forms of income from direct property investment....what about capital appreciation ?

Over the past 20 years increases in capital value have far exceeded yield sometimes.

Mike4
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Re: Property vs Passive

#301721

Postby Mike4 » April 19th, 2020, 11:18 am

The point that jumps off the screen at me and no-one has mentioned so far is the principle "invest in what you know".

For this reason I only invest in property as I know more than the average bod about buildings and dealing with the public. I know nothing and have no interest in for example, oil stocks so I don't even consider investing in them - I'd get eaten alive I'm sure! Same applies to the OP with property I suspect. From a standing start, s/he would be at risk of making some or all the newbie mistakes and thes can turn out to be expensive.

In addition, I've never really understood the rush for diversification. Seems to me that if you diversify perfectly, all you achieve is buying the 'whole market', (whatever that means to you) so you might as well buy trackers and save yourself all the trouble of picking a well diversified portfolio.

Just my thoughts as a run-of-the-mill tradesman.

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Re: Property vs Passive

#301730

Postby videoman » April 19th, 2020, 11:52 am

I have been a landlord for over ten years now with three properties I let out.

Pros: steady monthly income (if you have good tenants)
capital appreciation of property price

Cons: lack of monthly income if poor tenant
letting agent fees (I pay 10% plus VAT on two properties)
gas safety cert required every year
electrical cert required for all new tenancies from June 2020 (existing tenancy from June 2021 I think)
property insurance cost
any maintenance issues which arise
capital gains tax when you sell

I have always been lucky with tenants and cannot remember any time when I have not received the rent but some tenants like to think they can just leave a property in whatever state they like when they leave and I find this is the biggest problem. Currently just sold one of my properties and tenants left two weeks ago but after three and a half years in the property and I don't know what they do but its now needs a refurb.

Many landlords are leaving the business due to rules and regs which nearly always suit the tenant and the scrapping of Section 21 and lengthy court proceedings for non payment of rent. Also interest relief on mortgages has been withdrawn although all my houses are paid for and so will not affect myself.

Good luck whatever you decide

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Re: Property vs Passive

#301735

Postby rthak » April 19th, 2020, 12:03 pm

The other thing with direct property is you can leverage with worrying about margin calls. That significantly increases returns (and also potentially losses) but you never need to be worried about having to sell in times of panic because of a margin call.

To me that is the singlest biggest reason I prefer direct property to REITs (although do own some REITs for geographic diversification - all my buy to let’s are within a 5 mile radius of where I live).

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Re: Property vs Passive

#301794

Postby merluzzo » April 19th, 2020, 4:18 pm

I had two rental properties, one of which I sold in the summer. These are my thoughts after a few years as a landlord. I also invest in index trackers.

Some real life considerations about being a landlord:

1. Using a managing agent does not mean you can forget about it. Say there is a problem with a boiler. You can tell the agent to just deal with it, but chances are you will overpay for the repair. Possibly a lot. Tradesmen used by agents behave differently from those you may use for your own property. They are not interested in your satisfaction with the job, as you don't even meet them. They want to keep the agents, not the landlords, happy, which is a different thing altogether. Also, some agents illegally get a "cut" from the tradesmen, which adds to the cost of the repair. The only way to mitigate this is to spend time investigating the nature of the problem, asking the agent to get more than one quote, etc. These activities are time consuming and rather unpleasant IMHO, because everything has to be done through an intermediary who is busy and usually inefficient.

2. It is not only the number of hours you spend dealing with problems (with or without managing agents). It is the complete unpredictability of when a problem will rear its ugly face. I had tenants contacting me on Xmas day because of a burglary while they were away. Boilers seem to to break up at very inconvenient times too. Such issues need to be addressed urgently.

3. As a landlord, you are an easy target for the government of the day. Rules have made things more difficult year after year in the past decade and I do not see this trend changing anytime soon, although a conservative government is better than a labour one in this regard. Related to this, there is a widespread feeling that you are depriving young couples of affordable properties and profiteering from other people's misery. This can contribute to an adversarial attitude that makes the interaction with the tenants tense.

I sold one of my properties not because I thought it was the best thing to do financially, but because I find dealing with these issues increasingly unpleasant. I may get rid of the other property in the next few years, although I like the diversification it provides to my portfolio.

Admittedly, this is very personality-dependent and what makes me suffer may not be a big burden for you.

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Re: Property vs Passive

#301908

Postby DelayedInvestor » April 20th, 2020, 11:21 am

Sorry for the delay in responding. Thanks all for the input. Lots of really helpful information.

Mike4 wrote:The point that jumps off the screen at me and no-one has mentioned so far is the principle "invest in what you know".

Very true. I just need to figure out if I actually know anything. :lol:


rthak wrote:To me that is the singlest biggest reason I prefer direct property to REITs (although do own some REITs for geographic diversification - all my buy to let’s are within a 5 mile radius of where I live).

Thanks. That is interesting. As somebody who has experience of both REITs and direct property do you think that if you take leverage out of the equation then returns (capital appreciation + yield) would be similar in the long run?

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Re: Property vs Passive

#301983

Postby UnclePhilip » April 20th, 2020, 3:20 pm

DelayedInvestor wrote:Hi,

I periodically wonder if investing in property directly is something I should look into but I have always tended to discount it due to risk and time consumption.

So, the question I'm going to ask here is how do you, with experience of buying/letting/selling property, feel it compares to just putting your money in index trackers or a even a diversified collection of REITs if you want to stick with property?

It seems to me from various sources that it is very time consuming. Do you tend to find that you get a good return for time spent? For instance, if you just put your money in trackers and used the time to work extra hours in your main job or perhaps get adhoc work on the side instead would you achieve better or worse results?

I know one advantage of property is that you can get interest only mortgages which will definitely improve your yield but it seems like a massive increase in risk. The way I was thinking about it was: suppose you could get 5% yield on a property and had an interest only mortgage with a rate of 3% on half of the value of the property you'd now be getting 5% + (5% - 3%) = 7% yield. So whilst 2% is a good improvement the risk you're taking with either a rise in interest rates and/or a fall in value seems very substantial. Have I misunderstood something here?

Cheers.


This reminds me of the old joke about the tourist meeting an Irish farmer and asking him the best way to Dublin. "Ah" said the farmer after a long pause, "well I wouldn't start from here...."

Towards the end of the last century, when credit was freely and cheaply available, and prices were rising nicely, we used gearing to invest in residential property. We made life changing sums, stopped buying in 2001 when rental yields fell due to rising property values, and a few years later began selling. We now have just one left (unencumbered) and a home that is only possible due to all this.

However, you can't start from here; not at the present time. That was a window of opportunity that comes around once in a while. We were of an age where renovation was exciting. Now, older and much frailer, having the bulk of our net worth in global equities is much easier, and involves minimal effort.

Perhaps in a few years BTL may have its time in the sun; so long as, per Mike's post, it's something that's intrinsically interesting to you. At present, with the proceeds of our last property sale, I've been investing quite heavily into equities after their dramatic plunge recently. Whether that'll prove to be sensible, time will tell.

My tuppence worth: global equities at this chapter in the story. Good luck, anyway!

Uncle

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Re: Property vs Passive

#302732

Postby brightncheerful » April 23rd, 2020, 5:19 pm

Generally, when people talk about property they have in mind residential. Albeit the largest sector, residential is only one of several sectors: the others being commercial, agricultural, rights (such as sporting rights, mining, etc). Commercial is also a sector, comprising offices, industrial, shops, leisure.

When you buy property direct, what you can buy depends upon how much money you have, how much you can borrow and what property is available at the time. Whether you can do better by buying direct depends upon judicious choice, technical skill and know-how.

When you buy indirect, for example shares in a property company or in a property fund, you are buying the manager(s) of property that has been bought already. After the directors and mangers have taken their cut, operating costs and so on, what's left is for shareholders, either for retention in the company's reserves or distribution via dividends. The share price is normally based upon the market's perception of the net asset value of the properties. The NAV itself a product of the company's valuer's informed opinion.

The advantage of buying direct is that you can buy what you want but only from what's available when you want to buy. The disadvantage is that because you buy what you want what you want might not transpire good purchase. You are also in control although that's an illusion because often it is the tenant that thinks it is in control which means you can be led up the garden path trying to wrestle control from the tenant.

The advantage of buying indirect (shares or units) is that generally you have more to choose from and if you are so mind spread your risk by buying in different sectors. The disadvantage is that most prop cos aren't interested in small shareholders and only went public in the first place to get access to cash that for whatever reason couldn't be borrowed from the bank. Having got the cash and bought some properties, the prop co can then borrow from the bank and/or issue bonds and raise new money through placing and rights issues. Whether having a lot of money including access loads of it makes the directors of the company better investors than you depends. Many quoted prop cos are better at property than the finance, even though finance is 50% property. If you assume that prop cos directors and managers are only interested in their own careers and how much they can get out through stock options, etc then …

With direct ownership, the yield is the relationship between the capital value of the property and the rent net of non-recoverable expenditure but before tax. With shares, the yield is the divi return on the share price but because quoted propco directors tend to think that a low sp and a high yield is not in keeping with the image of their efforts chances are they'll cut the divi to a level commensurate with what they think shareholders deserve for all the effort and hard work that the directors etc put in to managing the company. (Cynic that I am)

With shares, whether you get a divi at all depends upon whether company's tenants pay rent. Intu and Hammerson are currently two examples of what happens when retailers do not pay their rents. With direct ownership, whether you get rent depends upon whether your tenant pays or goes bust.

One factor that can make direct property ownership seem better is that owners rarely allow for inflation and loss of interest on their equity when calculating capital gain. For example, a property bought for £100,000 10 years ago should if the value has kept pace with inflation be £132,580 now. So if it would fetch £150,000, the real gain is £17,420. Not to be sneezed at but not £50,000

Personally, I do not invest in property direct, other than my ppp. Occasionally I dip my toe into the stock market but I don't tend to stick around too long because even in a booming market I am sceptical whether really worth my effort.

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Re: Property vs Passive

#303683

Postby 1nvest » April 27th, 2020, 7:52 pm

Owning your own property is like being both tenant and landlord. Avoids having to find/pay rent to someone else and liability matches your 'rent' expenditure. With a UK home - that's often enough £ risk exposure, allocate the rest to a mix of the primary reserve currency (US$ invested in US stock) and a global currency (gold, which is also a commodity).

Fundamentally along the lines of what diversification that ancient Talmud were advocating millennia ago - third each in land, merchandise and reserves.

Rebalancing a illiquid asset such as home value = awkward/expensive, so mix that in with some UK stocks, perhaps REIT type stocks.

Physical gold trading - can be expensive (wide spreads), so mix that with some gold funds.

Job done. Focus your attention elsewhere. Apply a 2% SWR for income (2% of the total start date portfolio value, and uplift that amount by inflation as the amount drawn in subsequent years - so a nice steady/reliable income), and a sideline to that is that the portfolio is also automatically paying your 'rent' (that has historically averaged around 4%, so 1.3% benefit when proportioned to a third of the portfolio value). Historically on average that has also seen portfolio value rise 2.5% ahead of inflation (where inflation in this context is one third house price increases, two thirds consumer price increases). So you might use discretion to draw additional income of up to 2.5% and still see portfolio value maintained in inflation adjusted terms.

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Re: Property vs Passive

#307401

Postby rthak » May 10th, 2020, 9:36 pm

DelayedInvestor wrote:Sorry for the delay in responding. Thanks all for the input. Lots of really helpful information.

Mike4 wrote:The point that jumps off the screen at me and no-one has mentioned so far is the principle "invest in what you know".

Very true. I just need to figure out if I actually know anything. :lol:


rthak wrote:To me that is the singlest biggest reason I prefer direct property to REITs (although do own some REITs for geographic diversification - all my buy to let’s are within a 5 mile radius of where I live).

Thanks. That is interesting. As somebody who has experience of both REITs and direct property do you think that if you take leverage out of the equation then returns (capital appreciation + yield) would be similar in the long run?


If you took leverage out of the equation then probably REITs would have delivered a higher return but that maybe because they themselves are leveraged.

BUT - What has actually happened on my direct property is that increases in rent have far exceeded my expectations which and interest rates have fallen faster than expected. That combination has led to far more surplus income than anticipated which has enabled me to grow my portfolio quicker than I had projected...that never would have happened had I invested solely in REITs.

I’ve maybe been lucky with tenants as so far never had a default or bad tenant so to me I can’t see why you wouldn’t invest directly (assuming it’s close enough to you to keep an eye on (my first BTL was three doors down from where I live!)


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