[Estimated time to read: 3 minutes]
As a Brit, I understand our national obsession with property.
And as a child, I watched my father achieve huge success with the creation of a buy-to-let portfolio.
He inspired me.
With a good strategy - that’s replicable if you’re an expat owning property in the UK – I made a huge amount from UK property in a single year.
I’ll share the strategy in an upcoming post…keep an eye out for it.
But is property really a short-cut to financial freedom?
Is investing in bricks and mortar a substitute for a well-invested passive investment portfolio?
“Real estate is always good, as far as I'm concerned.” - Donald Trump
Property can be a great inflation-proofing asset.
But, when you start to look at how far yields have fallen, and how the burden of managing buy-to-let property can be intense, the case for property becomes less clear cut.
Most buy-to-let mortgages require the purchaser to put down at least a third of the value.
So, if you buy a £150,000 flat for example, you need to find £50,000 – and then you can borrow the rest.
This is gearing…
Reward and risk increase in line with the multiples of your capital that you borrow.
And if you mortgage to buy, you can lose more than the value of your equity capital.
A loss of 35% - like the 2007 crash wreaked – could wipe you out.
Forget location – focus on net yield!
In 2014, before George Osborne’s assault on the buy-to-let sector, the national average net yield was just 2.3%.
Then came Osborne’s attack.
Now landlords are ultimately to be taxed on gross income – not profit. And in effect, tax can eventually be payable on what might be described as non-existent income - or rather - income already owing to a third party, i.e., the lender. For some landlords, tax rates will eventually exceed 100%.
And it gets worse.
Since the 1st of April last year, anyone buying property other than their main residence must find 3% more in Stamp Duty Land Tax (SDLT) too.
If you’re buying to let, with a purchase price of £300,000, the extra 3% would equate to £9,000 – but this is payable on top of the £5,000 regular SDLT bill - bringing the total payable to £14,000!
Previously, landlords could offset 10% of their rental income as costs - now they can only offset actual costs incurred.
And whilst capital gains tax (CGT) has been reduced from 28% to 20% on most assets – on property it remains 28%!
Suddenly, owning buy-to-let property seems more expensive than it’s worth.
As well as SDLT and CGT you must factor in: -
- Income tax
- The illiquidity of your investment
- The cost of repairs
- Periods of non-occupancy
- Time needed to manage
- The leverage risk
- Legal fees
- Insurance
- Estate agent fees…
“Short of attacking them with flame-throwers, or impaling them on stakes, it is hard to know what else the Bank and the Government can throw at landlords.” - Daily Telegraph, 31st March 2016
If you don’t fancy the foregoing, a sensible investment strategy that combines a portfolio of passive funds will give you: -
- Liquidity
- Time
- Tax efficiency
- And the opportunity to leverage – if you really want it!
And such an approach has consistently outperformed property over the long-term. But it’s just not as tangible and somehow feels different!
In conclusion…
It is possible to get the best of both worlds by mixing property investing and passive investing.
But you have to know what you’re doing, and not fall in to a trap of ever diminishing yields.
In a forthcoming post, I’ll explain how I make the most of my UK property as an expat…
I’ll show you how you can replicate my success…
And how you can balance property and passive for a well-diversified outcome if you can’t get over the British property bug!
