Re: Buy to Let vs Share Portfolio
Posted: April 27th, 2019, 10:09 am
Hi,
BTL has been the get rich slowly story of the baby boomers and I agree with other comments here that going forward I don't believe it will perform to the same degree and nor do people tend to factor in the time associated with maintaining properties. However, I find it interesting to view the factors that attracted people to buy to let and see why, even now, people are unwilling to view shares portfolios in a similar way. I think BTL was attractive because:
1. huge leverage - borrowing 60-90% of the houses value and clipping the difference between interest and rental rates + capital growth.
2. no mark to market - when property turned down - people do not mark down the value of houses in their heads and the relatively opaque pricing structure is actually a helpful feature for long term holders in this regard.
3. illiquidity - I think this was actually a benefit to long term holders. In 2008 if houses were liquid everyone would be heading for the exit but this doesn't happen due to its slower paced nature.
These factors link in with a radio show I listened to many years ago. An analyst was speaking on shares and a study which had been done - they found the biggest problem and difficulty prevalent with private investors was panic, over trading and stock picking - all factors which by the nature of the BTL market you are limited somewhat. Therefore, while I agree with the consensus here - the share portfolio is the way to go but only if you can manage these pitfalls. I have approached it trying to build in some of the features of the buy to let market:
1. My portfolio is with interactive brokers who provide very cheap leverage. I use 30% leverage which will decrease over the course of my working life as if I had a BTL mortgage.
2. 100% of my portfolio is in global trackers; investment trusts etc. No single names ever.
3. The hard part - don't check the prices daily nor ever sell into cash.
4. Review investment trusts 6 monthly at their semi-annual statements.
Rules which are easier written than followed. I started investing post 08 so have not faced the acid test of not panicking in the face of a downturn - we will inevitable see
BTL has been the get rich slowly story of the baby boomers and I agree with other comments here that going forward I don't believe it will perform to the same degree and nor do people tend to factor in the time associated with maintaining properties. However, I find it interesting to view the factors that attracted people to buy to let and see why, even now, people are unwilling to view shares portfolios in a similar way. I think BTL was attractive because:
1. huge leverage - borrowing 60-90% of the houses value and clipping the difference between interest and rental rates + capital growth.
2. no mark to market - when property turned down - people do not mark down the value of houses in their heads and the relatively opaque pricing structure is actually a helpful feature for long term holders in this regard.
3. illiquidity - I think this was actually a benefit to long term holders. In 2008 if houses were liquid everyone would be heading for the exit but this doesn't happen due to its slower paced nature.
These factors link in with a radio show I listened to many years ago. An analyst was speaking on shares and a study which had been done - they found the biggest problem and difficulty prevalent with private investors was panic, over trading and stock picking - all factors which by the nature of the BTL market you are limited somewhat. Therefore, while I agree with the consensus here - the share portfolio is the way to go but only if you can manage these pitfalls. I have approached it trying to build in some of the features of the buy to let market:
1. My portfolio is with interactive brokers who provide very cheap leverage. I use 30% leverage which will decrease over the course of my working life as if I had a BTL mortgage.
2. 100% of my portfolio is in global trackers; investment trusts etc. No single names ever.
3. The hard part - don't check the prices daily nor ever sell into cash.
4. Review investment trusts 6 monthly at their semi-annual statements.
Rules which are easier written than followed. I started investing post 08 so have not faced the acid test of not panicking in the face of a downturn - we will inevitable see