Many years ago, with a lump sum to invest, I harboured visions of ending my days as a millionaire property baron with a string of rental houses.
Well, not exactly, but I did invest in a property — and today I’m not a millionaire. So let’s look at some numbers.
What’s a good rental yield? I’m seeing property experts suggesting gross yields of 8% as being around the minimum you need to make it worthwhile. Anything less than that could leave you struggling to meet maintenance and running costs, and those other one-off expenses that you’re sure to get.
Then I’ve had lengthy voids, which have lowered my long-term yields. I’d estimate my average net yield (the money I get to keep, before tax) at around 3%. How much could that grow into?
Three decades later
If you invested £100,000 with a 3% annual yield, you’d have £190,000 in total investments after 30 years — plus any proceeds from wherever you’d invested the earned rent (perhaps 1% per year in a savings account), and any house price appreciation. That latter is what has made buy-to-let investing a good thing in the past, and my property has probably trebled in value over that timescale. But even with that, you’d still be way short of turning your £100,000 into £1m — you’d have around £390,000.
But I firmly believe that property prices over the next 30 years will not come closes to the rises of the past 30, and we’ve been seeing that change in trend already over the past few years.
The alternative?
If, instead, that same £100,000 had gone into the stock market, I think it’s reasonable to expect returns of around 6% per year. After all, Royal Dutch Shell shares are currently offering nearly 6% from dividends alone — and the oil giant has not cut its dividend once since the end of World War II.
Over 30 years, that would turn £100,000 into £574,000. Now, it’s still not a million, but it’s significantly more than that 3% yield that property would have brought you had you invested that amount of cash in a property that performed as mine has. And it’s treble the rental returns.
Perhaps most importantly of all, if you buy top dividend-paying FTSE 100 shares and just leave them there for decades while reinvesting the dividend cash, there’s no work to do! No maintenance, no chasing rents, no voids, no searching for new tenants…
Still like property?
But what if you still believe that property provides a real, tangible, investment? Literally a bricks and mortar one? I think that’s fair, and I reckon property (both residential and commercial) will be safe in the coming decades. The way I’d do it? I’d go for a real estate investment trust (REIT) or two, specialising in different parts of the market.
If you buy shares in a REIT, you’re spreading your cash across part ownership of a large number of properties, and thus spreading the risk — there’s no shouldering 100% of the risk by taking on a whole property yourself. And someone else manages all of the properties for you.
Which ones would I buy? I do like Primary Health Properties, which is in the growing healthcare sector. And my colleague Rupert Hargreaves gives Empiric Student Property the nod.
Both, I think, would make excellent additions to a BTL-beating real estate stock portfolio.