XIRR 10.2% over 20 years

[MyNameIsUrl]

I recently sold an investment I held since 2003. The analysis of the cashflows in and out over this period shows an XIRR of 10.2% annually before tax. I made a lump sum investment in 2003, followed by several years of small monthly investments. In the later years I made small monthly withdrawals. In 2013 I sold the investment for cash.

It’s probably obvious from the cashflow profile the investment was a buy-to-let property: a deposit paid at time of purchase, then several years where mortgage payments exceeded rent, followed by low-interest years where rent exceeded mortgage payments.

I’m posting this for the interest of others, not because I want to show off my investing skill – indeed, it would be interesting to hear which alternative investment strategies have done better over the past two decades. With hindsight I could have made more with much less effort. At times managing the property felt like having a second job.

Obviously the amount of cgt and income tax I paid depends on my personal circumstances and would be different for a higher earner or lower earner, but just for interest the XIRR after paying cgt dropped to 9.6%, and after income tax I estimate around 8%.

Interestingly, although I easily calculated XIRR in excel, I’m not entirely clear how much money the investment made. The hundreds of payments/receipts at different values (because of inflation) make it difficult to understand the actual earnings – if I’d had a second job instead, at least I would know my hourly rate.

[puffster]

Sold in 2013 or 2023?

Regards, Puffster

[MyNameIsUrl]

Sold in 2013 or 2023?

Sold in 2023! Sheesh, what a critical typo!

[SebsCat]

I’m posting this for the interest of others, not because I want to show off my investing skill – indeed, it would be interesting to hear which alternative investment strategies have done better over the past two decades.

Probably not many. I run a mechanical portfolio (*) for the investment club I'm in. That is currently showing an XIRR of 11.7% over 22 years, but it was 15.7%pa at the 20 year anniversary - i.e. it's done pretty poorly over the past two years and it's still not beyond possible that over the much longer term it won't outperform - or even underperform - the market. Which is one of the problems with any strategy, let alone individual investment, that chance plays a large part in the outcome.

* - shares are picked on set criteria, held for 12 months and then sold.

Interestingly, although I easily calculated XIRR in excel, I’m not entirely clear how much money the investment made. The hundreds of payments/receipts at different values (because of inflation) make it difficult to understand the actual earnings – if I’d had a second job instead, at least I would know my hourly rate.

In absolute terms, you could just add up all the receipts and subtract the outgoings. If you want to be more precise then they could be adjusted to take into account CPI. But for any sort of hourly rate you would also need to consider the amount of time spent which you've probably not recorded. For a really meaningful calculation though, you would also need to consider the counter-factuals (eg what if you had an extended void, a bad tenant who trashed the place, etc). Pretty much impossible unfortunately, so you might as well consider it a great investment or an awful inconvenience based on your actual experience.

[bluedonkey]

It would be interesting to know what difference gearing made to the return. Or at least, did it boost the return or reduce it?

[scrumpyjack]

I guess the main lesson from this is the effect of gearing on the return. By financing part of it with a mortgage and with property prices increasing over that period, the return will largely be a function of the level of mortgage.

Of course it could have gone the other way and, if property prices had fallen, there could have be a large net loss!

[ReformedCharacter]

Probably not many. I run a mechanical portfolio (*) for the investment club I'm in. That is currently showing an XIRR of 11.7% over 22 years, but it was 15.7%pa at the 20 year anniversary - i.e. it's done pretty poorly over the past two years and it's still not beyond possible that over the much longer term it won't outperform - or even underperform - the market. Which is one of the problems with any strategy, let alone individual investment, that chance plays a large part in the outcome.

How do I join? Over 25 years ago I was invited to join a local share club and a few years ago while repairing the club's guru's computer he happened to say that they had just doubled their money, I roughly worked out the XIRR to be a little over 3%, glad I gave it a miss.

RC

[SebsCat]

How do I join?

As a start, know several of us over several years! But do bear in mind that we are down over the last 24 or so months...

[GoSeigen]

Probably not many. I run a mechanical portfolio (*) for the investment club I'm in. That is currently showing an XIRR of 11.7% over 22 years, but it was 15.7%pa at the 20 year anniversary - i.e. it's done pretty poorly over the past two years

Ouch! I make that a drop of 38% over two years. Was it almost all in gilts/fixed interest?

Mind you my portfolio has also pretty much flatlined since Nov 2021, although I have drawn down about 5% of its value for living expenses. So not the happiest two years' investing...


GS

[MyNameIsUrl]

In absolute terms, you could just add up all the receipts and subtract the outgoings. If you want to be more precise then they could be adjusted to take into account CPI. But for any sort of hourly rate you would also need to consider the amount of time spent which you've probably not recorded.

I added up all the cashflows and got a satisfyingly big number, more than the original purchase price of the property. Re-doing the calculation after adjusting every item for CPI gave a figure around 90% of the unadjusted figure, which I'm still reasonably pleased with. I suppose I could make a stab at estimating the hours, but on reflection it would be of limited use - even if I did no physical work on the property in a specific month, the responsibility was always fairly heavy on me.

For a really meaningful calculation though, you would also need to consider the counter-factuals (eg what if you had an extended void, a bad tenant who trashed the place, etc). Pretty much impossible unfortunately, so you might as well consider it a great investment or an awful inconvenience based on your actual experience.

Wise words - the numbers are only part of the story. My experience did not include any really bad issues, so to some extent I have to consider the project a success - I'm now retired and I have a chunk of cash in the bank I wouldn't otherwise have had, which was my objective in 2003.

[MyNameIsUrl]

It would be interesting to know what difference gearing made to the return. Or at least, did it boost the return or reduce it?

I agree it would be very interesting, but I wouldn't know how to calculate this. I suppose gearing boosts returns up to a certain interest rate, and upwards of that point reduces it. My peak interest rate was 7.79% but has been 2 point something for the last decade, which helped me a lot. My original LTV was 73% - I couldn't have bought the property without a loan so even if the effect of gearing was to reduce returns from a non-geared scenario, I should compare the geared outcome with not doing the purchase at all.

[Lootman]

it would be interesting to hear which alternative investment strategies have done better over the past two decades. With hindsight I could have made more with much less effort. At times managing the property felt like having a second job.

The beauty of property investing is that it is done with borrowed money. So you can do it alongside equity investing. It is not either/or.

That said a 10% annual return is what the US stock market has given off for the last 100 years "with much less effort".

[Howard]

I’m posting this for the interest of others, not because I want to show off my investing skill – indeed, it would be interesting to hear which alternative investment strategies have done better over the past two decades. With hindsight I could have made more with much less effort. At times managing the property felt like having a second job.

I guess that getting a really enjoyable job with a substantial salary and retiring with an index linked final salary pension might be comparable?

(Reduced by income tax of course!)

regards

Howard

[Gerry557]

Can you do it again starting now.

I just wondered how much difference the current rule changes would make on the returns and the current environment.

Assuming all goes well you have a geared investment that should grow with inflation.

That inflation should reduce the effect of the initial loan but then you pay tax on that inflation with cgt.

As with most things there are lots of factors that can work for or against you. Voids, bad tenants and the costs of maintenance and upkeep. I know someone who needs a new roof on their let property. A big outlay that can't be avoided much longer.

I suppose if you have a long holding period it reduces the effects.

What you also do with the rent is another matter. A better life style, extra holidays or reinvest it over time in the markets. I suppose you might have been lucky hitting lower interest rates periods but now it's surviving in a rising environment.

I know some who are experiencing negative cashflows renting. They will probably do OK if they can hang on but most people look at the right now.

You mentioned personal circumstances such as tax rates which could have amplified effects now. If a couple with one not working you might be able to maximise things.

It's a long time to wait for the answers though.

[SebsCat]

Probably not many. I run a mechanical portfolio (*) for the investment club I'm in. That is currently showing an XIRR of 11.7% over 22 years, but it was 15.7%pa at the 20 year anniversary - i.e. it's done pretty poorly over the past two years

Ouch! I make that a drop of 38% over two years. Was it almost all in gilts/fixed interest?

Not that bad, it's down 20% from the Nov 21 peak. It's 100% UK listed shares so no gilts or fixed interest but it started picking housebuilders in late 2021 which was, shall we say, suboptimal...