Drawdown portfolio composition including rental

[c177fan]

I am 60, newly retired and trying to restructure my portfolio to optimise drawdown.

I am thinking of 70% equity and 30% cash/bonds but I have a small portfolio of, mortgage free, ‘Buy to Let’ property and am not sure whether I should consider it as ‘bond’ or somewhere between ‘bond’ and equity’ in terms of risk, its obviously not liquid in the short term but has generated consistent income over a number of years?

Any views and wisdom would be welcome

[tjh290633]

I am 60, newly retired and trying to restructure my portfolio to optimise drawdown.

I am thinking of 70% equity and 30% cash/bonds but I have a small portfolio of, mortgage free, ‘Buy to Let’ property and am not sure whether I should consider it as ‘bond’ or somewhere between ‘bond’ and equity’ in terms of risk, its obviously not liquid in the short term but has generated consistent income over a number of years?

Any views and wisdom would be welcome

My thoughts are that your risk with this portfolio of properties relates to blank periods and the effects of inflation, where you might wish to raise rent but cannot.

In this respect, I would call it part of the non-equity section of your portfolio. I would avoid bonds as such at a time of rising interest rates.

TJH

[xxd09]

Property that is not your home is usually regarded as an alternative investment to equities like bonds and gold etc
Add its value to the 30% bonds and that will give you your actual asset allocation
Property has over the years returned the same as equities but as you say it is illiquid and requires a lot of interest and expertise from the owner
Most investors usually plump for bonds that are easier to manage and are liquid for these reasons
However if you have expertise and interest in this area you should be OK
xxd09

[c177fan]

Thanks for the insights ...

How about using REITS or ? instead of BTL in the portfolio.

As you say property requires a bunch of expertise and the government has introduced so many additional rules and changed tax that it is not really worth adding anymore property and I am seriously considering a controlled sell off.

... so any thoughts on a purely capital generating REIT or ? (to take advantage annually of the CGT allowance) but with a similar risk profile to BTL

[Dod101]

Thanks for the insights ...

How about using REITS or ? instead of BTL in the portfolio.

As you say property requires a bunch of expertise and the government has introduced so many additional rules and changed tax that it is not really worth adding anymore property and I am seriously considering a controlled sell off.

... so any thoughts on a purely capital generating REIT or ? (to take advantage annually of the CGT allowance) but with a similar risk profile to BTL

REITS vary of course from the cautious such as Primary Health Properties to B Land and Land Securities via things like Segro and all the 'Big Box' stuff which have a big following with some. Just like a share (which of course they are) they can be passive investments and you just sit back and collect the PIDs (and dividends) I have been a landlord at various times and whilst it can be a profitable venture there is a good deal of work attached to any form of property letting business. As one gets older, equities I decided were the way to go, including a few REITS and a few ITs.

Dod

[dealtn]

... so any thoughts on a purely capital generating REIT or ? (to take advantage annually of the CGT allowance) but with a similar risk profile to BTL

REITs can't really be purely capital generating. By definition they are required to pay out 90% of (qualifying) income as dividends. You can "manage" this by buying/selling to avoid dividends, and personal income, but few would do that.

[Dod101]

... so any thoughts on a purely capital generating REIT or ? (to take advantage annually of the CGT allowance) but with a similar risk profile to BTL

REITs can't really be purely capital generating. By definition they are required to pay out 90% of (qualifying) income as dividends. You can "manage" this by buying/selling to avoid dividends, and personal income, but few would do that.

Yes I missed that point. REITS by definition are not specifically capital generating. In fact they are usually income generating otherwise there would not be much point in the property company becoming a REIT. That status (basically a tax break)i is in return for an undertaking to distribute not less than 90% of its income profits as a PID (Property Income Distribution) It may have other profits such as from property trading outside of this regime and if that generates distributable profits these profits may or may not be paid as ordinary dividends.

Dod

[xxd09]

REITs are simpler with less growth usually than actually owning and running a BTL-someone else has the hassle!
Still usually considered an alternative investment
Bonds have historically always been the investors choice to balance equities in a portfolio but people are always looking out for a substitute
REITs are often mentioned in this context but bonds are proving hard to beat!
xxd09

[TUK020]

Other thing to consider is the flexibility and potential to avoid future tax liability - income, CGT and IHT that comes from having your assets in granular form that can be held in wrappers, rather than only tradable in big discrete chunks.

Things like REITs, ITs can be gradually washed into ISAs - yours/spouses/kids/grandkids to avoid income, CGT (and potentially IHT).
In a General Investment account, you can trade between similar property securities each year to use up your capital gains allowance.

Over a 10-20 year horizon, this can make a huge difference

[c177fan]

All good thoughts many thanks and certainly more BTL does not seem sensible given other more flexible options.

Any other thoughts on medium risk 'capital only' generating investments.

[vand]

Personally I would think of it as perpetual fixed income, but estimate to collect only about 80% (use whatever ratio you like) of the true rental value to allow for voids and other difficulties can than arise with BTLs.

With state pension coming online too at 65, you are presumably in a pretty good shape.

One could argue that with
BTL income + State Pension

it's not worth holding any fixed income in your traditional investment portfolio... and I wouldn't be against that argument given current yields on government bonds.

I'm sure you know that you also have to option to mortgage the BTLs; interest rates are still very cheap. You easily borrow for below 2% and put that into higher returning assets.

Personally, I don't see much point in having unlevered property; you are giving up the greatest advantage of property investing - being able to lock in and borrow at stupid low rates... while taking on all the downside of having to fill and maintain the properties. You may as well switch to REITs or a global property fund instead.. although from a CGT and frictional cost point of view I guess it's not that easy.

[Hariseldon58]

Personally I would think of it as perpetual fixed income, but estimate to collect only about 80% (use whatever ratio you like) of the true rental value to allow for voids and other difficulties can than arise with BTLs.

With state pension coming online too at 65, you are presumably in a pretty good shape.

One could argue that with
BTL income + State Pension

it's not worth holding any fixed income in your traditional investment portfolio... and I wouldn't be against that argument given current yields on government bonds.

I'm sure you know that you also have to option to mortgage the BTLs; interest rates are still very cheap. You easily borrow for below 2% and put that into higher returning assets.

Personally, I don't see much point in having unlevered property; you are giving up the greatest advantage of property investing - being able to lock in and borrow at stupid low rates... while taking on all the downside of having to fill and maintain the properties. You may as well switch to REITs or a global property fund instead.. although from a CGT and frictional cost point of view I guess it's not that easy.

My experience is that when you retire your access to borrow money for BTL is close to zero, I had a couple of BTL’s that were mortgaged in 2014-2017 and when I went for another one in 2019 the computer said No ! I made a lot of efforts to find alternate finance. The lenders insisted you had to have income to cover the loan payments, they ignored the rental income, my income from a commercial property on a long lease, my investment income, they generously decided in the end that I could borrow £15k… Despite no other loans and assets in 7 figures.

BTL income is not always that reliable, tenants can be difficult and getting someone out is not easy…I’d be cautious without reserves.

My own approach is that I have an equity portfolio that provides a generous income on a 3% SWR , the commercial property and some REITs bolster that. Being too young for state pensions I have a cash/bond element (TIPs and 1-5 year bond fund) this covers 8+ years of income .

I view the cash/bond element as insurance, it’s provides optionality and in the event of serious market falls the opportunity to pick up bargains.

[vand]

Personally I would think of it as perpetual fixed income, but estimate to collect only about 80% (use whatever ratio you like) of the true rental value to allow for voids and other difficulties can than arise with BTLs.

With state pension coming online too at 65, you are presumably in a pretty good shape.

One could argue that with
BTL income + State Pension

it's not worth holding any fixed income in your traditional investment portfolio... and I wouldn't be against that argument given current yields on government bonds.

I'm sure you know that you also have to option to mortgage the BTLs; interest rates are still very cheap. You easily borrow for below 2% and put that into higher returning assets.

Personally, I don't see much point in having unlevered property; you are giving up the greatest advantage of property investing - being able to lock in and borrow at stupid low rates... while taking on all the downside of having to fill and maintain the properties. You may as well switch to REITs or a global property fund instead.. although from a CGT and frictional cost point of view I guess it's not that easy.

My experience is that when you retire your access to borrow money for BTL is close to zero, I had a couple of BTL’s that were mortgaged in 2014-2017 and when I went for another one in 2019 the computer said No ! I made a lot of efforts to find alternate finance. The lenders insisted you had to have income to cover the loan payments, they ignored the rental income, my income from a commercial property on a long lease, my investment income, they generously decided in the end that I could borrow £15k… Despite no other loans and assets in 7 figures.

BTL income is not always that reliable, tenants can be difficult and getting someone out is not easy…I’d be cautious without reserves.

My own approach is that I have an equity portfolio that provides a generous income on a 3% SWR , the commercial property and some REITs bolster that. Being too young for state pensions I have a cash/bond element (TIPs and 1-5 year bond fund) this covers 8+ years of income .

I view the cash/bond element as insurance, it’s provides optionality and in the event of serious market falls the opportunity to pick up bargains.

Indeed, I have heard similar stories. That is why it is possibly worth considering taking out a 5 or even 10yr fixed loan just before you head into retirement, which I discussed on another thread (albeit about residential mortgage).

[Kantwebefriends]

Personally, I don't see much point in having unlevered property; you are giving up the greatest advantage of property investing - being able to lock in and borrow at stupid low rates...

You could always use a margin loan on a General Investment Account if cheap leverage is what you are after.

Personally, just at the moment, I wouldn't.

For an investment that avoids both income tax and CGT you could always try gold sovereigns, bought through the Royal Mint or commercial companies. A useful diversification?