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BTL or an Investment Trust?
stephen heath
Posted: 06 January 2013 04:17:47(UTC)

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Hi, fellow investors,

I'm thinking of buying a one bedroom flat next year as an BTL investment. I've done the maths and it goes a little something like this:

£100,000 property price
£25,000 deposit
£75000, over 25 years = (about) £450 each month mortgage
£750 grounds service charge each year
Rent will be between £550-£600 a month

I'm not sure about tax, but I'm an expat so I don't pay any UK tax at the moment. Other costs may include a letting agency taking care of it, insurances, and any other unpredictable problems e.g. boiler.

My question: Would I be better putting my deposit in an investment trust and leaving it for 25 years and seeing what happens?

"be better" means: Which one would make the most return? I understand that we only have past experience to go on in regards to the future, but I'm really in two minds here.

I feel the stress of owning property and renting it our also needs to factored into this investment decision. I don't mind more stress for a greater return, but how great, I'm still unsure.

Any help would be gratefully received.



Posted: 07 January 2013 15:53:53(UTC)

Joined: 18/01/2010(UTC)
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Hi Steve - I can't comment on the tax position for expats, but a tax expert's opinion would be essential here before committing any money. Tax liability may be complicated and it might be expensive (perhaps retrospectively, with tax arrears maybe building up to a large amount). Residency throughout the property's ownership is probably a factor - do you intend to return to the UK in due course?

I was interested in your question because I am also considering buy to let in the UK, but I haven't moved yet (my money is mainly in shares and funds). There are a number of issues which are keeping me back at the moment, and some of them may apply to your situation too:

* One bedroom flats may be harder to let and/or sell than two bedrooms

* A lot of landlords say that the hassles can be considerable (tenant rent defaults, damage to the property, disputes and sometimes legal action necessary). An agent can take some of the hassle away, but the expenses remain.

* A lot of UK towns are saturated with new and newish-build flats. Building quality and location are paramount - who will want to rent and what type of renter do you want to rent to?

There are potential advantages, of course, which is why I am still interested. 25 years ought, unless capitalism is completely destroyed, to produce a healthy appreciation in value - but whether investment trusts would return more in the same time frame - only time will tell.

Good luck.


Posted: 07 January 2013 16:04:12(UTC)

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BTL could be a good move as property prices are in the doldrums. You can use your personal allowance to cover any tax implications. If you live abroad you will need a good agent to look after the property. Full service is likely to cost 15% of the rent +VAT ie. 18%. It sounds a lot but without that you're likely to have at least 18% voids not to mention the headaches from sorting out problems.

You should now be able to calculate what return you will get plus there is the possibility of an increase in the capital value of the property. You can compare that with the historical performance of investment trusts - presumably you wouldn't stick it all in one trust.
Posted: 07 January 2013 16:05:05(UTC)

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It's an interesting question and one that will be exercising many on here.

The tax position is probably key. For many of us, paying 40% tax on rental income makes ISAs a better bet.

Property prices in the UK fell in value by an average of 1% over 2012. They will probably go up again in future but don't expect stellar gains anytime soon...

Your costings should also take into account:

- Voids - budget for at least one month (prudently two months) per year without rental income

- Initial furnishing to a good enough standard to attract tenants who will pay top dollar

- Agency costs will be at least 10% of rental + VAT

- Insurance (buildings and contents) maybe £400?

- Repairs, and refurbishments (kitchen, bathroom etc) will be needed over a 25 year period

- Landord's inspections of gas appliances etc

- 'Problem' tenants and non-payers

Add to this the 'hassle factor' and then consider if the increase in return is sufficient.

Let us know what you decide please.
Dave Duffy
Posted: 07 January 2013 16:44:09(UTC)

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Hi Stephen

I was using BTL as an investment vehicle for some 8 years (when there was good capital growth). Looking over your figures there will be probably little or no income to worry about taxation with the figures you have given here.

The void periods, maintenance, gas & electric safety checks, etc etc will most likely eat up anything left after the letting agent has had his share. Then as an Expat you have to think about how much you are being charged for repairs unless you have plumbers and a general handyman you can trust.

My excuse for selling up my equities and going into BTL was that I thought stock indices were looking toppy and house prices were beginning to climb. It was a good call but even then there was not much rental income profit to be had due to higher interest rates. It was Capital growth that paid off and IMO I seriously cannot see much of that for the rest of this decade, maybe around couple of percent a year in line with general inflation. But that is only my opinion, being right before obviously doesn't mean it is going to be right this time so the choice is down to you at the end of the day.

As regards Investment Trusts, they are some fairly low cost ones out there but if investing for longer term try to spread your money about, maybe a mixture of income, growth, generalist trusts could be suitable. Since end of 2008 I have been making regular contributions into a UK Income and also a Generalist trust (spreads money into different gegraphical regions). I feel happier with doing that than being an Expat LL and can sleep better at night.

Expat LL's will have rental income taxed in the same way as a UK resident LL. Rental income minus Mortgage Interest, Letting Agent Fees, safety certs, repair expenses will be taxed by HMRC as it is UK Income. UK Citizens continue to have a tax-free personal allowance. One other thing to beware of is the country you now reside in and how they treat income and capital gains (when you sell rental property) from other countries. So you need to check on the Double Tax Treaty (if one exists between UK and your host country) on HMRC site

A lot to think about so don't rush in to making a decision on something major like this. Best of luck with whichever route you take

Dave Duffy
Posted: 07 January 2013 16:50:06(UTC)

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Cardeulis;17424 wrote:
It's an interesting question and one that will be exercising many on here.

The tax position is probably key. For many of us, paying 40% tax on rental income makes ISAs a better bet.

Property prices in the UK fell in value by an average of 1% over 2012. They will probably go up again in future but don't expect stellar gains anytime soon...

Your costings should also take into account:

- Voids - budget for at least one month (prudently two months) per year without rental income

- Initial furnishing to a good enough standard to attract tenants who will pay top dollar

- Agency costs will be at least 10% of rental + VAT

- Insurance (buildings and contents) maybe £400?

- Repairs, and refurbishments (kitchen, bathroom etc) will be needed over a 25 year period

- Landord's inspections of gas appliances etc

- 'Problem' tenants and non-payers

Add to this the 'hassle factor' and then consider if the increase in return is sufficient.

Let us know what you decide please.

Good points there Cardeulis, but the OP cannot utilise ISA's as he is a UK Non-resident (Expat)

If he does use Investment Trusts he also has to think about whether he requires income or growth (or a mix) and how he will be taxed (or not) in his host country.

Some countries will not levy tax on income and/or Capital Gains he makes on UK investments, but most do. Double Tax Treaties often allow for a person not to pay tax twice on same investment
Posted: 07 January 2013 17:15:11(UTC)

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While I was an expat I had a couple of rental properties for a while, one ended with squatters after a weeks void & the other with damges considerably over the deposit. Main problem I experienced was with the agents, used 3 & all were totally useless. I found their only interst was in taking the 15%, they used poor maintainers & never checked on their work, also ignored requests from tenants & never proactive.
My daughter/son in law have a couple, similar experience with agents but they live reasonably close to their places & have their own maintainers.

I recommend IT's, risk level depending on length of time 'till you'll need to cash in. Easily controlled from a distance. Also much simpler to raise half of the stake if cash needed, which is tricky with a property.
1 user thanked D B for this post.
Cape Town on 07/01/2013(UTC)
Posted: 07 January 2013 18:12:58(UTC)

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In your shoes I would buy somewhere on a BTL long term fixed rate interest only mortgage in Central London, try to get 2 bedrooms even if the second one is rather small.

Whilst doing this I would go out and find a very classy non-spivvy bricks and mortar stock broker, explain what I am doing and listen to what he says.

If I didn't have an instinctive feeling that he is the right person for me then I would keep on looking until I did.
The arrangement with the broker should be on the basis that they cannot buy or sell without referral to me.

Here you need to remember the Woody Allen quote: A stockbroker is a person who invests your money until there is nothing left.

But hey! These are investment Trusts - true, even so there are good ones and bad ones, just like brokers.

The reason for a mortgage is that in real terms the value of a BTL loan will depreciate over the term and that the value of the Investment Trust should go up, particularly if there is a mix so it is important to have some that specialise in overseas shares. If my Trusts also paid dividends then this yield will go towards making the monthly mortgage payments.

Barring nuclear war, it is hard to see how it could fail, there again I am old enough to remember Rolls Royce.

All the best.

Posted: 07 January 2013 18:13:37(UTC)

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I considered investing in a 2-bed flat some 15 years ago. If I had, my £55,000 investment would have turned into perhaps £165,000 now (although a flat in same block is still unsold at that price after 3 months..). I thought I would be better off in funds / ITs, and so it proved as I invested the money in European funds and Asian ITs. I avoided all the hassles of tenants etc so well spelled out by others (owning the house I live in is quite enough hassle for me, and it took ages to recover from the problems that arose from renting it out for less than a year – the agent never did pass on all the income). By phased sales of funds, I avoided any liability to CGT. I retained the flexibility of assets that could be sold piecemeal, and I really have no regrets other than that I would now have a nice flat that I might be willing to move into myself. Being better informed about ITs now, I fancy my chances of continuing to do better with a portfolio of good ITs than with BTL, and with all the advantages of flexibility. I think for an expat the advantages of ITs over BTL are considerable.
Posted: 07 January 2013 18:49:58(UTC)

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£ 6.6k income p.a. for £ 100k ? less financing, insurance, void, agency costs... looks like about 5% yield without capital gains.
Lots of people seem to have gone into BTL recently.
Have we seen the bottom of the property market ? IF interest rates do rise quickly we could see big falls.
Wouldn't be for me (although approx 50% of all my assets already in property)
BUT if we are (at last) in a rising property market could be a great investment.
Posted: 07 January 2013 19:03:08(UTC)

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He is not an UK taxpayer, also it is his sole residence.

Gross income here is gross income.
Posted: 07 January 2013 19:16:48(UTC)

Joined: 22/12/2011(UTC)
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This is an interesting question. It prompted me to look up where the FTSE100 index was on 7 Jan 1985. The index was revamped in 1984 and for the anniversary of today's date 1985 was as far back as I could go. Then I looked at the Nationwide Housing index for the Outer South East for the same period. Both the FTSE100 and the Nationwide index have increased by roughly 6% compound over this time. This seems to me to be highly relevant to the debate.
Alan Jay
Posted: 07 January 2013 19:42:38(UTC)

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Surely the level of risk has to be looked at? Investing in a property equals all eggs in one basket whereas putting your money in an investment trust is spreading the risk over all the companies in which the IT invests.
Posted: 07 January 2013 19:43:56(UTC)

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I think you under-estimate the costs of letting - I have two one bedroom BTL's and the maintenance charges are nearer £1000 pa. on each. Then you have to pay the agents to let and maintain, and as others have pointed out it is impossible to find an agent who isn't trying to make a turn on the charges for maintenance, so everything is expensive unless you are on the spot to intervene. Then you have to pay for the gas to be checked out and various other incidental insurances and charges. My flats are in the South East, close to trains and buses and with parking, the agent has always re-let immediately - but I am guided by their judgement on what to ask for rent and don't get greedy. I do not have mortgages on these flats and see a return of about 3% on capital after charges - with a mortgage I would be out of pocket in terms of income.

I bought a while ago and the capital gain is still good. Looking forward I would think the government will have to increase inflation to pay off debts and the value of your mortgage would be eroded over time - and if you are resident abroad you presumably wouldn't pay any capital gains tax.

I also invest in lots of investment trusts and I have to say they are a lot less trouble. If you look at TrustNet you can see which ones are at a discount, how their NAV has behaved over the last five years, what the net yield is etc. If you look at the websites of the ones that are interesting you can read the annual reports where they list all the companies they are invested in (or were invested in when the report went to press) and the managers' reports etc. You do need to take the trouble to do this as there are some investment trusts which are run basically by and for wealthy families and have rather idiosyncratic structures - Majedie for example.

Investment trusts also have the advantage of being cheap and easy to buy and sell and even if the stock market is down you can liquidate if you need or want to.
Simon Broaders
Posted: 07 January 2013 20:26:48(UTC)

Joined: 07/01/2013(UTC)
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Where ever you live, I think you will be taxed on the flat in the UK, as it is 'income arising in the UK'. You don't say how globally mobile you are, but I believe some countries (like Denmark) have a property value tax which also includes the value of property outside that country.

Investment Trusts are more liquid if your situation changes suddenly.
Michael Edwards
Posted: 07 January 2013 20:41:05(UTC)

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I doubt whether anyone who needs an answer to the question posed should seriously consider either investment.
J Thomas
Posted: 07 January 2013 22:05:22(UTC)

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Personally I would invest in directly held blue chip high dividend paying shares, or an Investment Trust. The return on capital should at least equal and will probably exceed your net return on a BTL, without the worry, stress, and inconvienence.
An extreme example of what can go wrong renting property is in the City where I live, a few years ago a Mother murdered her three children in a rented townhouse, since then that property has lain empty, nobody will rent or buy it at any price, it is virtually worthless despite costing a buyer in excess of £250,000.
Terrible for all concerned, and a reminder that renting property is far from low risk.
Posted: 07 January 2013 23:27:13(UTC)

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Nobody has yet mentioned the effect of gearing, which is surely the reason property has been such a popular investment over the past decades. By saying the choice is between investing £25k in a unit trust or a BTL, you are not comparing like with like because your BTL investment is actually £100k. Therefore, if over a period both go up, say, 25%, you'll have made 25% gain on your unit trust but 100% on your equity investment in the BTL. The risk, of course, is that it's the same on the downside!
alan franklin
Posted: 08 January 2013 03:39:23(UTC)

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Some excellent, informed posts on this thread.

We (my wife and I) have had several decades in property- renting and development-and running share portfolios here and overseas.

I think if you can afford just one property the advice to select a basket of high dividend yield shares is best. Spread the risk and buy quality companies on down days. Research thoroughly and look at dividend cover, P/e and cashflow etc. Only buy what you understand.

Property has been good to us but we always bought low and rented while they appreciated. That era is over. I doubt there will be property price rises any time soon.

When I hear stories of rental yields of eight, ten per cent etc I know that all costs are not being properly accounted for. Discounting capital appreciation, I would say the true yield is more like threee or four per cent. We have done this since the days when you had to bed and breakfast, and in two countries, so have stacks of experience.

Properties need constant maintenance to ensure quality tenants. Washine machines etc need service contracts. You need gas safety inspections, insurance, accountancy, etc etc. Lots of costs that people never count in.

I am on the board of a block of flats where we own two properties and this takes a lot of time, running about etc. The problems are quite frequent.

In Britain we get rates of 7.5 per cent from agents, but I oversee all maintenance as we have a team of maintenance men. Try and do it from afar and you will get ripped off. Agents are none too bothered what repais cost you. You have to be hands on and know your tenants.

We run properties in America without an agent, but only because we hand pick tenants who have a lot of responsibility. This year virtually all the rent from one house went on a new roof ($9,000), insurance ($1,600), local taxes about $2,500, new dishwasher, $350, maintenance, about $430, and so on. Not exactly instant riches!

Property works if you understand it, work at it, know the area, keep a close eye on things and have a very good agent. Putting everything into one property is unwise.
3 users thanked alan franklin for this post.
jebc on 13/01/2013(UTC), richjohn on 14/01/2013(UTC), a moss on 12/05/2013(UTC)
k r
Posted: 08 January 2013 08:50:15(UTC)

Joined: 08/10/2012(UTC)
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Just a few comments;

1. 25 years is a very long time. My guess is you will need to review your decision several times over that period, it is unlikely to be a one-off exercise.

2. Real estate investment is quite different to investing in other financial instruments, because as the name suggests, you have a physical asset on your hands to deal with, and with this comes other issues, for example;
- Managing agents fees.
- Landlord obligations due to legislation.
- Your time managing the asset (there will be some required regardless of whether agents appointed or not).
- Tenant defaults - individual landlord experiences can vary significantly depending on location, tenant profile, length of tenancy agreement and so on.
- Entry and exit times can be lengthy and stressful, and costs are high.

My own view is that I would need a mindset where I am prepared to devote significantly more time, £ for £, on real estate investments and see it much more akin to a 'business' rather than pure investment. It is possible to invest in the real estate sector on a pure investment basis, without getting your hands dirty so to speak, by investing through property funds but you need to do very careful homework before investing because these can hide some nasty skeletons.

Good luck with your decisions.
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