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Investing for your kids
Brad
Posted: 11 May 2018 08:10:54(UTC)
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I am thinking about what will be the best way to give my youngun a leg up in 21 years when with luck they will have graduated from University. My thoughts are along two channels:

1] By a BTL property for them, Over the 18 years it would take for them to reach University the vast majority of it could be paid off and they have an enviable start to post University life where they have their own place with little remaining debt. If they chose to study in the local Uni, of course they could use it themselves during their studies.
I think the big advantage here is that whilst we would need to retain a financial buffer for fallow periods and running repairs, otherwise input could be kept small on an annual basis.
A deposite of £20-25K would be as much as we could currently consider.
I realise that post university they will likely want some career freedom and may wish to rent out the property or sell it as needs be going forward due to possible geographical change but the funds in principle would be there.
Can a trust funded property purchase only be done if they are to be an occupier?

2] To invest, probably via S&S Junior ISA, There are obviously some restrictions, e.g. that the initial £20-25K would have to be spread of 4-5 years, the other element would be then the continued input of funds. Any dividends or growth would stay in the pot, but would this route only be better than the BTL if we continued to invest?

After the initial sum, we will be limited in how much we can put aside on a monthly/annual basis, I'm led to believe these children are mightly expensive to keep! couple that with her indoors reducing her hours and we will neither be higher rate tax payers, though not in the poor house either.

At this point, I'm not really after the specifics of what to invest in stocks/funds wise. More which route is likely to be the better in our circumstances?

To hopefully answer some questions that might arise. We are home owners via mortgage, combined income of ~£60k (after reduction to part time) In 12 years we are due to be mortgage free (assuming no upsizing, which is not currently planned) and could up our investment rate then.

Did anyone invest in a similar way 18 years ago, which way would you go now with the benefit of hindsight?
philip gosling
Posted: 11 May 2018 08:37:46(UTC)
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Of course most kids do not go to the nearest University - they choose one that suits their academic, social and/or sporting ability plus one that will accept them. You are 'betting" on a BTL gaining more than stock market over 18 years and the money you can " invest" is the same for both. You get tax advantages with Junior ISA, the LISA, and spare cash can be invested now outwith any ISA (get grandparents to invest on behalf of child who can then use own personal allowance to exempt any tax implications until shares/money can be transferred into Junior ISA each year) . Versus a now well taxed and more strictly controlled regime with increasing political actions likely to occur over next 18 years to increase pressure on second and third home owners i.e, any Buy To Let investor.
I benefitted from both buying a second home and letting it out since 1974 and stock market investment and both did well with property the winner because we changed up houses over the years and bought in London in 2004.. There is little or no climate now to help BTL - so for the future it is unlikely property will do as well in the future and the hassle l of running a BTL yourself or even more expensively using a letting agent may significantly reduce future property returns. Do what KL says take the sensible hands off investing route and use a global Tracker and by investing monthly the money that could heave been used for a mortgage, estate agent fees, tax, running expenses, voids, etc you 'should' do better.
4 users thanked philip gosling for this post.
Tim D on 11/05/2018(UTC), Brad on 11/05/2018(UTC), Jeff Liddiard on 11/05/2018(UTC), King Lodos on 14/05/2018(UTC)
Alan Selwood
Posted: 11 May 2018 10:01:22(UTC)
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I would not go the BTL route in that situation.

It's too inflexible - political headwinds now; could be in wrong place for later.

Junior ISA to the max, plus separate dealing account from which to feed cash across to future years' Junior ISAs.

Given the time period, most advisors suggest accepting volatility in exchange for better long-term growth. So I'd be thinking of (for example) SMT and Far East growth investments. Possibly even a bit in Frontier Markets (my current favourite would be Vietnam).

Just ideas, not recommendations!
4 users thanked Alan Selwood for this post.
Brad on 11/05/2018(UTC), Jeff Liddiard on 11/05/2018(UTC), john brace on 14/05/2018(UTC), Tom Bourne on 15/05/2018(UTC)
Brad
Posted: 11 May 2018 11:39:26(UTC)
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Thanks for the responses guys. Does making a probable better return on shares in both instances require constant further investment, or are you suggesting that in the right funds the growth without further input (excepting the reinvestment of any dividends) could still be a more profitable way forward?
For Example £20000 invested with 5% interest would work out at £49100 excluding any dividends. 10% giving £120093.
For an example I tried a £150K house, £20k deposite with a 4% interest rate on a 25 year basis. Total paid came to ~£90k. Of course this then is subject to probable long term price growth from figures Nationwide average house prices adjusted for inflation since 1975, growth rate has been 2.9%. So the value increase might be assuming similar growth (Quite a leap I know) from £150K to ~£252k. Added together giving £192K. In 18 years I don't imagine I will not spend anything, but also I would hope to have a modest yield too to help with those bills. Anything else I could conceivably be saving either in the J ISA or in a personnal account for those rainy days.
What sort of growth could I obtain in a high performing managed fund? Enough to trump the possible property appreciation?
I'm sure you could drive a truck through the holes in my argument but not knowing a great deal about stocks & shares, how might the S&S out perform the BTL over that period?
Jim S
Posted: 11 May 2018 12:51:11(UTC)
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Its hard to compare expected perforrmance of the 2 approaches without making a LOT of assumptions

I wouldn't rule out BTL as a good idea, but it does involve
- a lot more work.
- initial stamp duty at purchase
- tax rules are complicated. Even if you are both lower rate taxpayers and split the mortgage, I believe 50% of the gross rent will get added to each of your incomes for tax calculation purposes, so this might push you into the higher bracket. I am not sure about exactly how this works, but you may find you lose money each year so you'd need to do your homework.
- nationwide, property prices seem to be in a mild decline, although this varies by region. So maybe there's no great rush to start.
- presumably you would need to sell it to your child at 18, so there would be CGT costs at that point.
- affordability rules are stricter now, getting the BTL mortgage can be a challenge
- I'm not sure if you were thinking about buying the property in Trust, if so that would need advice and also incur some costs. I suspect this only makes financial sense if you own multiple properties.
- risks of rising interest rates, so you'd probably want a 5 year fix

So I think BTL can still be good long-term investment if you get a bargain, can manage and rent it efficiently, and its the kind of place which people want to rent in that area. But there are a lot of caveats, whereas investing the maximum amount every year in a stocks and shares JISA is simple, easy & tax efficient. So I would start with JISA whatever, and then if you're still interested in BTL, start doing some serious homework and look at the cheaper end of the market. If you have spare cash after paying into the JISA, you and your partner might be better off building your own ISAs and topping up your pension contributions.
2 users thanked Jim S for this post.
Jeff Liddiard on 11/05/2018(UTC), Brad on 11/05/2018(UTC)
TJL
Posted: 11 May 2018 13:04:34(UTC)
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'Did anyone invest in a similar way 18 years ago, which way would you go now with the benefit of hindsight?'

Yes and no.
I started investing when our first child was born in the mid 90's, but I didn't invest specifically with children in mind.
I was a complete novice, but my intention was (hopefully) to accumulate as much wealth as possible to cover financial commitments in the years to come.
Thankfully, with both children now at university, it appears to have worked.
Would I do anything different...?
That is a very big question because I am not the investor now that I was then, and it has been a constant learning and adapting process, which continues.
I started with funds for many years, have dabbled in individual company shares, ETFs etc., but have been settled for quite a while on a basket of investment trusts which I chop and change as I think appropriate but am more or less happy with.
So my message would be:-
- You don't have to invest specifically for the children
- I wish I had ventured into investment trusts much earlier
Hope it helps.
P.S. Despite being happy with investment trusts, I read the comments on this forum about passive World Index type investing with interest.
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Brad on 11/05/2018(UTC), Tom Bourne on 15/05/2018(UTC)
David 111
Posted: 14 May 2018 17:15:08(UTC)
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You say you want to give them a leg up in 21 years time. If you go the JISA route, they will have full ownership at age 18. This may or may not be what you want.
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King Lodos on 14/05/2018(UTC), Brad on 15/05/2018(UTC)
King Lodos
Posted: 14 May 2018 17:34:52(UTC)
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Brad;62120 wrote:
What sort of growth could I obtain in a high performing managed fund? Enough to trump the possible property appreciation?
I'm sure you could drive a truck through the holes in my argument but not knowing a great deal about stocks & shares, how might the S&S out perform the BTL over that period?


I'd forget the managed fund approach over that kind of timeframe, and – as phillip gosling says – go with a market tracker .. Open an ISA with Vanguard, and perhaps go for their Lifestrategy 80 or 100 fund.


Now, on whether this will be a better investment over 20 years than a BTL ..

No one can really answer that one .. Which asset class does better will come down to all sorts of macroeconomic factors – which governments get in; what kind of Brexit we get; etc.

However .. what a lot of people don't appreciate is that property prices should only rise in line with inflation .. Long-long-term, if they really outpaced inflation, property would simply become unaffordable .. And you could argue that's what's happened now .. But the appreciation in property prices is a relatively short-term phenomenon, and is connected to several decades of taking on lots of debt. (see: long-term debt cycle)

So while 20 years is really too short a timeframe to make a forecast, statistically stocks should be the better investment – and it diversifies you a lot more .. A single property can run into all sorts of problems
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Brad on 15/05/2018(UTC)
kWIKSAVE
Posted: 14 May 2018 17:42:50(UTC)
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Stay away from property due to initial costs already mentioned and ongoing maintenance and hassle.

Vanguard Global Tracker/ Lindsell Train UK Equity/ Liontrust Special Situations.

When child graduates consider buying a property for her/him then.
Keith Cobby
Posted: 14 May 2018 18:04:31(UTC)
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The reason property/BTL has done well is the gearing aspect. Put down a 10% deposit and borrow the rest. Imagine what could have been done by using the same mechanism for investing in funds.
5 users thanked Keith Cobby for this post.
King Lodos on 14/05/2018(UTC), Len Skilton on 14/05/2018(UTC), nigel thorpe on 15/05/2018(UTC), Brad on 15/05/2018(UTC), Tom Bourne on 15/05/2018(UTC)
King Lodos
Posted: 14 May 2018 18:27:57(UTC)
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And some US economists have recommended the same thing for stocks .. That you should effectively take out a huge loan in your 20s; put it in an S&P500 tracker; and and gradually pay that loan down until retirement.

Obviously that necessitates believing US stocks will always rise, long-term.

The problem with property is rates generally track inflation, and property *should* only rise with inflation, but drifts off course over pretty long stretches .. So with property you have to hope you catch a time when the market's generally taking on debt, and not paying it back (which is what our current austerity measures are really about)
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Brad on 15/05/2018(UTC)
kWIKSAVE
Posted: 14 May 2018 22:23:38(UTC)
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With inflation having been low relatively for ages and likely to be so for quite a while, debt hangs around a lot longer.

Another reason perhaps not to gear up with property purchase.
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Brad on 15/05/2018(UTC)
Brad
Posted: 15 May 2018 07:48:16(UTC)
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I took a look at the Vanguard global tracker. A quoted example for the last 10 years showed the volatility and risk with shares and whilst indicative that if you hold on, you will likely to make money longer term, timing is key. The example being a $10k investment that in 10 years yielded ~$17K. (c.f. a house and 10 years of payments and even ignoring price growth you would have paid more off on your capital). On the other hand had you jumped in 1 year later your $4.5k would have grown to that same ~$17k in 9 years.
Conclusion, either way is a risk and I'm still no closer to committing to either path. More research about projected costs for BTL needed, but also which funds will best suit family needs.
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