Buy to Let vs Share Portfolio

[Walkeia]

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

[BusyBumbleBee]

Welcome to the Lemon Fool, Walkeia, and your very first post puts an interesting slant on things - thank-you - BBB

[AsleepInYorkshire]

Scenario: I want to make a large investment, but investing in a large share portfolio or undertaking a buy to let. The source of capital is 100K of cash, and 400K borrowed on my house on a 60% LVT mortgage. The mortgage would be a 10 year fix 2.35%. I have a reasonable on-going/secure income to cover the mortgage, and I am 45 years old, and my appetite for risk is medium/high. I am married, hence technically can spread investments across 2 GCT allowances etc. I have reasonable pension provision, but have yet to use ISA's in any serious way.

Traditionally in the past, it seems most people have invested in buy to let. Historically, this investment strategy has proved very steady - with reasonable income and capital growth. Personally, I hate BTL - as the government has significantly ratcheted up BTL disincentives.....extra stamp duty, CG Tax, Income Tax off-set reduction - to the point when combining with tenant hassle - it begins to feel un-investable. But most people you speak to - still think this a sensible option!

But when you mention the same investment approach to shares instead of property, then most people think you are completely bonkers. My approach would be to buy 10 sensible Capital UK & World Growth Investment trusts / funds / ETF's (5 investments each between me and my wife), capital growth focus as income would be taxed at 40%...and then bed & breakfast them each year to crystalise gains/losses. And as you progress through the 10 year investment cycle, to place some of the investments into ISA's if and when limits allow. So by the end of the 10 years, perhaps 40-60% would be protected from tax.

So is the above approach to pursue a share portfolio just bonkers? Of course another approach is to simply to do nothing. Thoughts?

Hmm … earlier today I read Warren Buffet's Final Results Statement for Berkshire Hathaway. Something he wrote instantly struck a chord with me. "if you want to finish first, first you have to finish".

So I have to ask you why do you want to consider borrowing £400K please? Or if I may put that another way … "if you want to invest why are you borrowing?". Huge apologies for being so trite. If I was fortunate enough to be able to consider such an investment I would be reviewing the risks first. Would my health always be something I could rely upon. How long will I be able to earn my present income? How much control will I have over macro economic events which could have a negative impact upon my borrowings (sorry I can't say investment).

Ultimately I would find it impossible to convince myself to borrow money to invest in anything. On the other hand if I invest my own cash in various ways then at the worst all that can go wrong is I lose that cash. Ultimately I would be making sure "I finish".

Investing in stocks and shares can be relatively easy and there are many ways to reduce the risks associated with this. If I had £100K to invest (and I do) I would be looking to use the power of pound cost averaging as my first line of risk aversion. I'd probably suggest to others that they look to invest in an ISA or a pension or both. If you're a high rate tax payer then a pension may be more beneficial but this can be something each individual has to work out. ISA's are useful but I would view them as long term investments in excess of 15 years if I was using them for retirement purposes.

I'm not a tax guru by any stretch but I can't see any reason why you should not be able to avoid tax completely by correct use of pesnions and ISA's. That is unless you are planning to live on a huge income when you retire.

AiY

[hiriskpaul]

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

Have you had a look at DEGIRO for borrowing? They charge LIBOR+1.25%, cheaper than the LIBOR+1.5% lower tier at IB. IB works out cheaper than DEGIRO for borrowing over £160k. I have actually found IG spread bets on futures comparable if not cheaper than DEGIRO, even with the rollover spreads, but there is no tax to pay with spread bets which makes all the difference to me.

[Itsallaguess]

So I have to ask you why do you want to consider borrowing £400K please? Or if I may put that another way … "if you want to invest why are you borrowing?". Huge apologies for being so trite. If I was fortunate enough to be able to consider such an investment I would be reviewing the risks first. Would my health always be something I could rely upon. How long will I be able to earn my present income? How much control will I have over macro economic events which could have a negative impact upon my borrowings (sorry I can't say investment).

Ultimately I would find it impossible to convince myself to borrow money to invest in anything. On the other hand if I invest my own cash in various ways then at the worst all that can go wrong is I lose that cash. Ultimately I would be making sure "I finish".

Does this all come down to 'appetite for risk'', and the ability to simply 'handle that risk'?

I'm 100% with you by the way AiY, in that I made sure that one of the first things I did when I began to have excess capital regularly available to me, I began to pay down my mortgage debt in a serious way with a view to removing that debt completely before I channelled the bulk of that capital towards my investments.

Whilst someone might argue that there might have been a better 'financial' outcome available to me by carrying that mortgage debt and ploughing the capital that I used to pay it down into more 'productive' avenues, I do think very strongly that there's huge personal advantages to knowing that you own the roof over your head, and the 'sleep at night' advantage of knowing that no matter what the stock-market plans to do over the coming years cannot put something like that at risk has always been a huge driver to then enabling me to pursue an investment strategy with the capital that's been freed up now that debt has been removed from my outgoings.

Horses for courses, admittedly, and others may well be able to sleep fine whilst carrying large amounts of debt at the same time as having lots of capital invested, but it certainly wasn't something I could easily live with over the long term, and it's clear to me that long-term 'comfort' is a massive driver to any potential investment-strategy that I plan to implement, so paying down my largest debt was a key plank of that approach.

It's clear from reading TMF and this board over the years though, that there are investors out there with a much higher threshold for this particular aspect than me, and I think they deserve to do well if they are able to carry out such a 'borrow to invest' approach, but I think sometimes with investing there are outcomes that can't be measured in purely financial terms, and the 'comfort factor' that's come with paying down my biggest debt before continuing with my long-term investment plan is definitely in that category for me personally....

Cheers,

Itsallaguess

[AsleepInYorkshire]

Does this all come down to 'appetite for risk'', and the ability to simply 'handle that risk'?

Yes. It was remiss of me not to say that. The point I was making, which is very similar is that "we" need to be able to identify [all] the risks too. Often we convince ourselves that "it will never happen to us". I hope I haven't sounded as if I'm trying to disagree. You're point is as valid as mine. I hope you would agree that there are two specific points we have raised. Our ability to cope with risk and to identify them all from the outset.

I'm 100% with you by the way AiY, in that I made sure that one of the first things I did when I began to have excess capital regularly available to me, I began to pay down my mortgage debt in a serious way with a view to removing that debt completely before I channelled the bulk of that capital towards my investments.

Perhaps you know what's coming . Many shudder as I step into my pulpit and "preach". For I am a sinner . I've had some long term health issues which have blighted my ability to lead a normal life. That has opened my eyes to the significance of risk. So I would always say [preach] to anyone to pay off their mortgage first before investing. Simply based on my own [unfortunate] circumstances. But I'd also suggest to the OP that if he doesn't want to believe me then go and read what Warren Buffett has to say on the subject of borrowing money to invest.

Whilst someone might argue that there might have been a better 'financial' outcome available to me by carrying that mortgage debt and ploughing the capital that I used to pay it down into more 'productive' avenues,

And if you had taken such a risk and found it had worked against you then you would not have been able "to finish". "To finish first, first you have to finish"

It's clear from reading TMF and this board over the years though, that there are investors out there with a much higher threshold for this particular aspect than me, and I think they deserve to do well if they are able to carry out such a 'borrow to invest' approach, but I think sometimes with investing there are outcomes that can't be measured in purely financial terms, and the 'comfort factor' that's come with paying down my biggest debt before continuing with my long-term investment plan is definitely in that category for me personally....

"When you are up to your bottom in alligators it is virtually impossible to remind yourself that your initial objective was simply to drain the swamp". Or - (the 6p's) Prior planning prevents (insert word here) poor performance

AiY

[Walkeia]

Have you had a look at DEGIRO for borrowing? They charge LIBOR+1.25%, cheaper than the LIBOR+1.5% lower tier at IB. IB works out cheaper than DEGIRO for borrowing over £160k. I have actually found IG spread bets on futures comparable if not cheaper than DEGIRO, even with the rollover spreads, but there is no tax to pay with spread bets which makes all the difference to me.

Thanks for the info HiRiskPaul,

I did look into DEGIRO but decided upon interactive brokers as it worked out cheaper for the amount of margin I need. I completely agree with you that IG is a viable alternative and looked promising but I stopped short as my employment does not allow CFD accounts (paradoxically margin accounts are fine).

[Hariseldon58]

@Walkeia

Interesting approach, provided you stick to your guns it’ll probably work out.

My own experience of using leverage for shares has been so so, it did not win big ( or lose ), interest costs were higher then.....

I think , with hindsight of course, steep market falls arrive often enough that holding more bonds/cash would have been helpful to dive in when markets have fallen, even then, they can fall further....

Straightforward regular saving through thick and thin with a pretty much 100% equity portfolio worked out ok in practice.

Heavy market falls will test you and an intellectual awareness of what you should do, knowledge of the past etc is not quite the same as losing half a million or so...... it’s particularly tough that in bad times, a lot of things can go south, your job, cost and availability of credit....

Your comments about BTL and leverage are spot on, particularly lack of mark to market, its so much easier to kid yourself you could sell a property for X when reality might be ⅔ X....

[Walkeia]

@Walkeia

Interesting approach, provided you stick to your guns it’ll probably work out.

My own experience of using leverage for shares has been so so, it did not win big ( or lose ), interest costs were higher then.....

I think , with hindsight of course, steep market falls arrive often enough that holding more bonds/cash would have been helpful to dive in when markets have fallen, even then, they can fall further....

Straightforward regular saving through thick and thin with a pretty much 100% equity portfolio worked out ok in practice.

Heavy market falls will test you and an intellectual awareness of what you should do, knowledge of the past etc is not quite the same as losing half a million or so...... it’s particularly tough that in bad times, a lot of things can go south, your job, cost and availability of credit....

Your comments about BTL and leverage are spot on, particularly lack of mark to market, its so much easier to kid yourself you could sell a property for X when reality might be ⅔ X....

I appreciate the feedback; it's interesting to hear of others' experience. I am contemplating starting a new topic regarding margin and the approach I am following, as I think it would be an interesting resource for those thinking of following a similar route discussing the respective pitfalls and advantages.