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 Im not a millionaire. So lets look at some numbers.
Whats a good rental yield? Im 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 youre sure to get.
Then Ive had lengthy voids, which have lowered my long-term yields. Id 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, youd have 190,000 in total investments after 30 years plus any proceeds from wherever youd 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, youd still be way short of turning your 100,000 into 1m youd 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 weve 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 its 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, its still not a million, but its 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 its 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, theres 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 thats fair, and I reckon property (both residential and commercial) will be safe in the coming decades. The way Id do it? Id go for a real estate investment trust (REIT) or two, specialising in different parts of the market.
If you buy shares in a REIT, youre spreading your cash across part ownership of a large number of properties, and thus spreading the risk theres 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 likePrimary Health Properties, which is in the growing healthcare sector. And my colleague Rupert Hargreaves givesEmpiric Student Property the nod.
Both, I think, would make excellent additions to a BTL-beating real estate stock portfolio.
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