another BTL vs shares dilemma

[petronius]

I own a house in Manchester (no mortgage) that is worth around £320k. It is empty at the moment. I need to decide whether to sell it or let it. It can fetch £1000 pcm as a rental.

The area is considered "up-and-coming" and it is possible that house prices will go up considerably in the next few years.

However, I have let the property for the past three years and could do without the hassle involved. I took early retirement last year and rely on income from this and other investments.

I am tempted to sell the house and buy a global share tracker and/or a Vanguard LifeStrategy fund and/or a high yield share portfolio.

Nevertheless, what I fear right now is the extremely expensive state of the US stock markets, with a CAPE ratio of 31 against a historical average of 16 (S&P500).

UK and European markets are perhaps more reasonably valued, but a crash in the US market will arguably drag everyone else down.

Can anybody convince me that selling the house and investing in shares is the right thing to do? Or that I should just bite the bullet and rent for another three years?

[Crazbe7]

petronius

Similar problem. Empty rental property in an up and coming area with 'good prospects' for future price increases. No mortgage. Fed up with the hassle of rental. I'm considering 'shutting up shop'. Leaving it empty for a year, no furniture, everything drained/switched off and taking a calculated gamble on house prices rising. Will be a £2,000 hit + loss of rental income. I don't need the income. Maybe not for you but another option.

Crazbe7

[Walkeia]

I feel it's only right to stop short of advice.

My observations are

1. 3.75% income return should not be overly challenging to match with many REITS, Green infrastructure funds and household names' dividend yields above this level.
2. UK house prices - the long term chart says they go up; however in the next few years who knows.
3. Your investment selection is interesting for a retiree - both share tracker and HYP will have significant volatility at some point in the future. Vanguard life strategy for 50+ would be weighted heavily towards bonds. I guess it depends on your total asset pool and age; the greater the overall assets and the younger you are the easier the argument is to make for riskier assets and vice versa imho.

all the best!

[Hariseldon58]

I don’t think anyone should convince you to buy equity investments......

Do you have much experience of equity investing ?

Whilst US equities are expensive, don’t forget the currency aspect of investing overseas, the dollar is strong and the pound is weak..

Brexit......the pound could soar or fall heavily depending on how this pans out, an election and a Corbyn government might well be bad news for the pound and U.K. equities, threats to seize 10% of the shares of UK companies, who knows ?

There is so much this might happen and that might happen.....no one knows.

Being a landlord is not making you a popular figure, the target of tax and regulatory changes, your asset is very concentrated, one house in one locality and subject to the risk of one tenant defaulting.

An alternative might be a diverse portfolio of investment trusts or ETFs with a focus on income. It could contain property and both UK and International equities and perhaps bonds, some cash accounts. Some things will probably work out well and others not so good, but as a whole it spreads the risks significantly and a lot less hassle !

[petronius]

I'm considering 'shutting up shop'. Leaving it empty for a year, no furniture, everything drained/switched off and taking a calculated gamble on house prices rising.

I considered this possibility too. One issue is that private residence relief is going down from 18 to 9 months (plus time lived at the property) in 2020. I lived in the property for six years and let it for three, so would be affected by the changes.

[petronius]

Your investment selection is interesting for a retiree - both share tracker and HYP will have significant volatility at some point in the future. Vanguard life strategy for 50+ would be weighted heavily towards bonds. I guess it depends on your total asset pool and age

I will have a small DB pension at 55 (I am 53 now). This will be (if my calculations are correct) around £900 pcm . I also own another property currently let to students (plus one abroad also let). So overall I guess I can live with some exsposure to shares' or funds' volatility.

What is worrying me is more the feeling that shares could be very overvalued right now, rather than the intrinsic volatility of this class of asset.

[TUK020]

petronius

Similar problem. Empty rental property in an up and coming area with 'good prospects' for future price increases. No mortgage. Fed up with the hassle of rental. I'm considering 'shutting up shop'. Leaving it empty for a year, no furniture, everything drained/switched off and taking a calculated gamble on house prices rising. Will be a £2,000 hit + loss of rental income. I don't need the income. Maybe not for you but another option.

Crazbe7

Does this expose you to risk of squatters?

[petronius]

Whilst US equities are expensive, don’t forget the currency aspect of investing overseas, the dollar is strong and the pound is weak..

Interesting point. I tend to consider exchange rates as neutral (meaning they could go either way with equal probability), but a strong USDGBP now could help hedge the bets if the US faces a recession.

Being a landlord is not making you a popular figure.

Tell me about it. The government is making me feel like a criminal, while I am pretty sure I am offering a fairly priced useful service to people who do not want to buy (for instance because they are not staying in the area for more than a couple of years). But this is material for another thread...

[Spet0789]

petronius

Similar problem. Empty rental property in an up and coming area with 'good prospects' for future price increases. No mortgage. Fed up with the hassle of rental. I'm considering 'shutting up shop'. Leaving it empty for a year, no furniture, everything drained/switched off and taking a calculated gamble on house prices rising. Will be a £2,000 hit + loss of rental income. I don't need the income. Maybe not for you but another option.

Crazbe7

Does this expose you to risk of squatters?

Among other risks. Most probably you will need to tell your insurer who will probably put up your premium a bit.

[Spet0789]

I own a house in Manchester (no mortgage) that is worth around £320k. It is empty at the moment. I need to decide whether to sell it or let it. It can fetch £1000 pcm as a rental.

The area is considered "up-and-coming" and it is possible that house prices will go up considerably in the next few years.

However, I have let the property for the past three years and could do without the hassle involved. I took early retirement last year and rely on income from this and other investments.

I am tempted to sell the house and buy a global share tracker and/or a Vanguard LifeStrategy fund and/or a high yield share portfolio.

Nevertheless, what I fear right now is the extremely expensive state of the US stock markets, with a CAPE ratio of 31 against a historical average of 16 (S&P500).

UK and European markets are perhaps more reasonably valued, but a crash in the US market will arguably drag everyone else down.

Can anybody convince me that selling the house and investing in shares is the right thing to do? Or that I should just bite the bullet and rent for another three years?

To me, this is a very very straightforward. Your house, with a 1 month deduction for expenses, is yielding 3.5%. On any historic measure, it’s far more expensive than the US equity market and could easily fall in value by 30%. If you can sell it, do so and then drip feed the money into the stock market over the next 8 quarters, maximising your ISA and SIPP contributions as you go. Invest in a 50:50 mix of income investment trusts and VWRL. Over that period, draw some of the cash out to replace the income. Spend some on a holiday or a treat!

You should be left with a zero hassle, zero paperwork, zero tax portfolio which matches the yield of your illiquid, over-priced, work intensive asset and has far better prospects for capital growth.

[Parky]

What is worrying me is more the feeling that shares could be very overvalued right now, rather than the intrinsic volatility of this class of asset.

Houses are very overvalued too. Also a single house offers no opportunity to diversify between different sectors or countries. To me the risks are potetially as great with property as with equities.

[petronius]

Parky and Spet,

Sure, houses could be overvalued and prone to crash too, although Manchester is different from London and gentrification can be a powerful force in the right area.

Also, governments do fiddle with house prices. I was expecting a big crash after 2007 but they somehow (and questionably) prevented it with massive quantitative easing and ultra-low interest rates.

What do you think is the best metric to gauge house price levels? Average salary-to-price? Rent-to-price?

[Parky]

Parky and Spet,


Also, governments do fiddle with house prices. I was expecting a big crash after 2007 but they somehow (and questionably) prevented it with massive quantitative easing and ultra-low interest rates.

What do you think is the best metric to gauge house price levels? Average salary-to-price? Rent-to-price?

A Corbyn government, now looking distinctly possible, could easily engineer a house price crash, deliberately or accidentally.

Regarding a house price metric, The Economist publish a world-wide house price review from time to time, based on Rent-to-Price calculation, and the UK has been up there among the most expensive for a long time.

[Spet0789]

Parky and Spet,


Also, governments do fiddle with house prices. I was expecting a big crash after 2007 but they somehow (and questionably) prevented it with massive quantitative easing and ultra-low interest rates.

What do you think is the best metric to gauge house price levels? Average salary-to-price? Rent-to-price?

A Corbyn government, now looking distinctly possible, could easily engineer a house price crash, deliberately or accidentally.

Regarding a house price metric, The Economist publish a world-wide house price review from time to time, based on Rent-to-Price calculation, and the UK has been up there among the most expensive for a long time.

Agreed. On pretty much any metric you care to choose, UK house prices are exceptionally high versus history and versus other countries.

[StepOne]

I own a house in Manchester (no mortgage) that is worth around £320k. It is empty at the moment. I need to decide whether to sell it or let it. It can fetch £1000 pcm as a rental.
...
Can anybody convince me that selling the house and investing in shares is the right thing to do? Or that I should just bite
the bullet and rent for another three years?

Why don't you split the difference - mortgage the house (50% loan-to-value, interest only) and use the cash to buy shares.

Cheers,
StepOne

[genou]

Why don't you split the difference - mortgage the house (50% loan-to-value, interest only) and use the cash to buy shares.

Isn't the flaw there that no-one is going to lend petronius ( haven't read Tacitus in years ) the money if the house is un-let. Which leaves him managing a rental and a portfolio, which I'm not sure is where he wanted to be.

[genou]

Why don't you split the difference - mortgage the house (50% loan-to-value, interest only) and use the cash to buy shares.

Isn't the flaw there that no-one is going to lend petronius ( haven't read Tacitus in years ) the money if the house is un-let. Which leaves him managing a rental and a portfolio, which I'm not sure is where he wanted to be.

[Howard]

Can anybody convince me that selling the house and investing in shares is the right thing to do? Or that I should just bite the bullet and rent for another three years?

I haven't a clue whether houses or shares will go up over the next three years. But over the last five years, like many others commenting on Lemon Fool my widely diversified and neglected share/unit trust/IT portfolio has appreciated by over 50% (and over 20% in three years). I like Manchester a lot but I'm not sure many mid-priced houses there have appreciated that fast.

And, compared with being a Landlord, equity investment doesn't have to be very time-consuming.

Back in 2014 I seem to remember there were many experts predicting that US shares had reached a peak. One foolish thing I did around then was to listen to them and sell my Apple shares and reduce my exposure to the US market. If only I hadn't

Don't know whether this would convince you one way or another. Some people are really successful landlords but they do have to work at it.

Whatever you decide - good luck!

Howard

[Alaric]

Some people are really successful landlords but they do have to work at it.

Outside of the public (social) housing sector, it's all a bit of a cottage industry really.

What you don't see is a publicly quoted company, presumably structured as a REIT, that both marketed itself to investors as a worthwhile investment proposition and also to tenants and prospective tenants as a "responsible" brand in the field of lettings. In the retail sector, the small local store owned and run by a family has been replaced to a greater or lesser extent by branches of the major supermarkets, Tesco, Sainsbry's etc.

[Lanark]

Nobody can predict what the housing market or the stock market is going to do next.

I do think it is useful to balance out your investments between shares, fixed income (bonds and annuities) and property including the house you live in. If you have a big percentage of your assets in any one area then you should look to rebalance.