I know its the top of the property market and interest rates are on the up but currently sitting on £70k invested in the stock market. Principle residence has eight years left on mortgage. No other property. Additional £100k in various pensions with contributions on a monthly basis.
Question : It is better to leave the £70k or invest in a BTL.
Assumptions
Buy £200k flat (Surrey on mainline BR), 25 year int only mortgage, £40k deposit, £25k in mortgage offset account, £5k for initial fees / outlay. Initial monthly rental £775 (deliberately lowish), vacancy assumption one month in 12.
Returns same for Housing and Stock Market increase over 25 years (not unreasonable compared to returns since mid 80's). For both assume returns Yr 1-2 -2%, Yr 3-4 0% Yr 5 2% Yr 6-25 5% (again not unreasonable as average over the last 20 has been 6-8%)
Safe assumptions on costs (managing agents fees, service costs etc)
All future flows discounted at 3%. All ploughed into my amateur investment appraisal model
Results
BTL does not break even on rental until year 12 and just cumulatively breaks even over the whole 25 years, but..
After 25 years, discounted Capital gain (after tax) on flat is £190k and is higher than the investment in the stock market by £70k (due to the gearing benefit of the mortgage i.e you get capital gain on three times the investment).
As I see it, even though there are almost certain declines ahead for the property market, the gearing benefit still makes it a better long term investment than the stock market. There will always be initial pain for long term gain.
Am I out of my tiny mind ?
Question : It is better to leave the £70k or invest in a BTL.
Assumptions
Buy £200k flat (Surrey on mainline BR), 25 year int only mortgage, £40k deposit, £25k in mortgage offset account, £5k for initial fees / outlay. Initial monthly rental £775 (deliberately lowish), vacancy assumption one month in 12.
Returns same for Housing and Stock Market increase over 25 years (not unreasonable compared to returns since mid 80's). For both assume returns Yr 1-2 -2%, Yr 3-4 0% Yr 5 2% Yr 6-25 5% (again not unreasonable as average over the last 20 has been 6-8%)
Safe assumptions on costs (managing agents fees, service costs etc)
All future flows discounted at 3%. All ploughed into my amateur investment appraisal model
Results
BTL does not break even on rental until year 12 and just cumulatively breaks even over the whole 25 years, but..
After 25 years, discounted Capital gain (after tax) on flat is £190k and is higher than the investment in the stock market by £70k (due to the gearing benefit of the mortgage i.e you get capital gain on three times the investment).
As I see it, even though there are almost certain declines ahead for the property market, the gearing benefit still makes it a better long term investment than the stock market. There will always be initial pain for long term gain.
Am I out of my tiny mind ?
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