UK property or shares investment for expats

Many an expat investor faces the same dilemma. Should you invest in property or are shares a preferable option?

This is one of those big questions that makes enemies out of friends. As an investor in both I can see each side of the argument. I like them both equally, but that doesn’t mean one isn’t much better than the other. It depends exactly what you want out of your investment.

For most people most of the time the quality of an investment can be defined in three ways:

• Returns
• Work involved
• Risk

Before we take a look at each of these in a bit more detail its worth clearing up a bit of house keeping.

What kind of shares investment are we talking about here?

Just for the record, for the shares investment side of things we are talking about investing in index funds here (or index tracking ETFs), where you buy a fund that tracks an index that holds a broad diversified basket of different companies’ shares.

That way, over the long term, you beat 90% of professional money managers because research shows that after fees the vast majority of said professionals simply can’t beat the market. And if they can’t, the chances are you can’t either.

But hey, even better, because with index funds you are getting the returns without having to put the work in. Spoiler alert: This is a major advantage of shares which we will come to later.

It is also worth stating that we are comparing this type of shares investment against a buy to let (BTL) property. Not your own home.

Lot’s of smarter people than me argue that your own home is not an investment. I don’t agree entirely, but I would agree homes you live in are definitely not the best way to grow your wealth.

So just to be clear, we need to make a choice between a buy to let property or a broad based index funds (or ETFs).

I’m also assuming long term investment. That way I don’t really care that it takes months to sell a property or that the stock market drops double digits from time to time.

Which investment has greater returns?

All things being equal, investment returns should figure pretty highly on your list of what makes a good investment so we’ll kick off with those.

Here’s a quote from the London School of Economics based on over 150 years of data.

Between 1845 and 2016, UK home prices grew at an average annual rate of 1.1 percent in real terms.

LSE

That doesn’t sound like much when you say it out loud, but then again, having just come through a period where inflation was over 10 it might not be as bad as it sounds ie 1+10=11.

But whichever way you dress it up it doesn’t compare with shares. Research by esteemed finance gurus Dimson, Staunton and Marsh at Credit Suisse in their Global Investment Returns Yearbook suggests we should assume 4% real returns going forward for global shares.

So let’s just clarify those numbers. It’s 4% for shares and 1% for property and those are real numbers ie above inflation.

This means when it comes to choosing between them, the returns you can expect are four times greater for shares than they are for property.

Which in turn has to mean, when it comes to investment returns, there’s only one winner. Can you guess which one it is?

Brace yourself

Unless you are the next Warren Buffett, you’ll likely get greater investment returns from property than you would from shares.

You might be forgiven for being a little confused right now, but don’t worry you read that right. Even though we can expect average annual returns for property of only 1% above inflation compared to 4% for global shares, property will usually provide higher returns. Let me explain.

You see that 1% return for property ignores two critical components provided by bricks and mortar:

• Rental income
• Mortgages

Now experienced property investors can find properties that generate enough rental income to make a profit.

If you aren’t an experienced property investor you probably won’t. And that’s because there are a lot of costs associated with BTL. You can read more about them here if you like, but suffice to say, in many cases the fees, taxes and mortgage interest associated with BTL will eat most (if not all) of your rent.

But here’s the thing. It really doesn’t matter because there’s one thing about BTL that changes the game entirely and that’s a little thing called a mortgage.

Mortgage 101

Mortgages are to property investment what gasoline is to fire. In other words, there’s nothing like borrowing money to juice investment returns.

And whilst it is possible to borrow money to buy shares, that’s a different game entirely. One which comes with far too much risk for the average investor. That’s why you don’t see banks offering mortgage products to buy shares by the way.

Anyway, back to the power of mortgages.

Typically, mortgage lenders provide up to 75% loan to value (LTV) mortgages for BTL. That’s 75% of the cost of the property or 3 times as much as you put down as a deposit and that’s important. Here’s a quick example to illustrate why. It assumes you have £100K to invest.

• A 1% house price increase on £100K would give you £1K.
• A 1% house price increase on £100K + £300K borrowed from the bank gives you £4K

The magic lies in the fact that in both examples you invested the same amount of money.

Making 1K from £100K is a 1% return, but making £4K is a 4% return. By taking out a mortgage we’ve got the same return as we are expecting from shares.

Borrowing a bit of money from the bank has quadrupled your return and you didn’t really have to lift a finger.

Here’s where it starts to get really interesting.

Unless you pick a clanger, you’d expect the price of your house to double at some point in the future.

According to the rules of compound interest it would take about 18 years at 4% but remember they are real returns so in reality you’d get there quicker.

For the purposes of this exercise it doesn’t matter. We just need to know that prices do double.

Because if they do we could add another row to our example above. The numbers are a bit different when your house is worth £800K instead of £400K. Something along the following lines:

• A 1% house price increase on £800K would give you £8K and that’s an 8% return on £100K

Now we are getting an 8% return on our £100K investment. Of course, you’d get that same effect through investing in shares too. And to be frank you wouldn’t have any work to do, but here’s where things start to differ between these two investments.

Would you believe it if I said we are just getting going with property? The best property investors out there use a very special tool to help put the odds of exceptional investment returns in their favour.

You may have heard it mentioned. It’s called “remortgaging.”

How remortgages add fuel to the fire

OK whilst I admit remortgaging is pretty common, understanding what it means for property investing is anything but.

Think about it this way. There’s nothing to stop you taking out a new mortgage on your existing BTL that has now increased in value to £800K and then using that money to buy another property.

A 75% LTV mortgage on an £800K home is £600K. Half of that would continue on our existing property (ie our original £300K interest only mortgage) but what about the additional £300K?

Couldn’t we just use that to buy a new property? And if we did how would those numbers crunch out?

Well, we now have £1.1 million worth of property (£800K + £300K) and even though on the face of it we only expect to get a 1% return. That’s a 1% return on 1.1 million pounds and we still only put £100K into the deal.

In other words, we are getting a much higher return on our original investment of £100K.

In fact, we get £11K per year. And on a £100K investment that’s an 11% investment return.

All of a sudden we are getting a much better return than we would with shares. So lets put some numbers behind that:

£100K compounding at 8% annually for 25 years gets you just short of £700K. Not bad, considering you didn’t have to do anything for your money.

But what about at 11%?

£100K compounding at 11% annually gets you £1.36 million. That’s almost double.

Number crunching fatigue. Time for a quick time out.

Time out

I stopped after I’d remortgaged once. I also didn’t put anymore money into the deal, but your imagination doesn’t have to run too wild to envisage being able to carry on.

I mean, how difficult would it really be to remortgage more and save up more so that you can do things on a scale that is both larger and quicker?

And remember I’m playing with averages here. Whilst the research out there is pretty conclusive that average is the best you can hope to get for shares, property is a different beast entirely.

Yes, it requires time, work and experience but at the same time it can be done. Experienced property investors can and do consistently beat averages.

So to conclude this section, if you put the work and time in required, returns are likely to be much (much) greater for property vs shares investment.

But of course that doesn’t necessarily mean you should automatically invest in property. Read on for why.

Shares 1-0 Property

Work work work

I hope the caveat at the beginning of this article was clear in that we are talking about investing in a broad based index funds here.

Yes, you get average returns, but average returns beat 90% of the pros (who invest in shares) and average returns means you can sit back put your feet up and get on with your life while your money compounds for you in the background.

Typically, you sign up with an investment platform, pick a fund or two, set up a direct debit, and that’s you. We are probably talking about a couple of hours a year max.

Property on the other hand is a different kettle of fish entirely. And this is particularly true when you live overseas.

Even fully managed city centre apartments have an endless stream of tasks to be completed. Some trivial and some not so much.

No you don’t have to go around and unblock the toilet in the middle of the night, but yes you will have emails to reply to, decisions to make, and things to organise like self assessment tax returns and insurance. Take it from one who knows. These are more faff for non residents.

And if you are in it for the very long term, which you should be, you’ll have to be very lucky for everything to go smoothly all of the time. My guess is, most property investors should expect the odd sleepless night from time to time.

In other words, there’s loads more work to be done with buy to let vs shares (& additional trouble for expats).

Shares 1-1 Property

Which is riskier?

Finally we come to risk. In my experience it’s this last point that tends to catch a lot of British people out.

There are lots of people out there on any given day asking themselves should put money into buy to let.

They’ve probably done a bit of research into investment returns and the possible work involved, but if you ask them which is riskier property or shares they’ll nearly always for the the latter.

To most people most of the time it’s a done deal that needs no further discussion.

But the fact of the matter is, this couldn’t be further from the truth.

I think the risk involved with both investments is best explained via an example.

Take your average morning (as I imagine it).

• You wake up.
• Check the messages on your phone.
• Go to the bathroom.
• Go downstairs.
• Eat breakfast.
• Get dressed.
• Get in your car.
• Drive to work.
• Sit down at your desk.
• Use your computer until 11am break.
• Order a coffee delivery.
• Have a meeting.
• Grab a sandwich from the local supermarket.

OK maybe that’s not your morning, but I bet you know somebody who does have days like that. Now what’s this got to do with the topic in hand I hear you ask?

Let me add a little detail to the itinerary to help explain.

You wake up. (Not only are the companies that made your bed, bedding and pyjamas in my investment fund, I own shares in all the shops where you bought them. That means I made money when you spent yours).

Check the messages on your phone. (Not only do I own shares in the company that made your phone, I also own shares in your telephone services provider and some of the companies responsible for your apps, so whenever you use them I earn a little money in my investment account)

Go to the bathroom. (Not only do I own shares in your bathroom suite manufacturer, I also own shares in the company that makes your toothpaste, toothbrush, mouthwash, soap, hair shampoo and conditioner…. I could go on)

I think I’ll stop there.

And whilst I appreciate that in truth, I might not own shares in absolutely every service and product you use on a daily basis, I’m pretty certain that I will own shares in 90% of most people’s.

How can that be you may ask?

Well, because the fund I invest in gives me exposure to 90% of what’s out there. (Vanguard FTSE All World UCITs ETF in case you are wondering).

Even if you don’t use those companies’ products and services, the companies who make the products and services you do use will do. There’s just no way around it. That’s because I own all kinds of companies in all kinds of locations around the world.

The companies in my portfolio are generating money for me 24/7 globally.

24/7

Now and again something comes up in the world that may impact one or more of those companies. Pandemics, natural disasters and major government legislation changes come to mind.

But in practice it doesn’t matter to me because whilst some of the companies in my fund may be impacted, the others will more than make up for the slack.

In fact, I’m confident by the very fact that Tim Cooke, Warren Buffett, Jeff Bazos, Mark Zuckerberg, Elon Musk and all the rest of them are working for me.

When you invest in the stock market you are buying ownership shares of businesses.

Yes, your share will be small, but non the less you are an owner and these guys are working for you.

I own shares in Apple, Microsoft, Amazon and around 3000 more just by investing in one fund. If these companies make money I’ll get some in my investment account.

If the world faces big problems, I can sleep at night knowing my money is in good hands. I’m pretty sure the Cookes and Buffetts of this world will do better than I would in the face of crisis.

Essentially my risk is diversified across thousands of companies and jurisdictions in all kinds of business areas and decisions that impact my finances are being made on my behalf by the best business brains on the planet.

Now to me, that seems pretty much as safe as houses, which brings me to……..

A single buy to let property on a single street in a single town in a single country.

Why buy to let is a bad idea

A single share of Vanguard’s All World ETF can be bought for about £80 at the time of writing.

That £80 would be split between thousands of companies throughout the globe working in every kind of business area you can imagine.

Conversely, you’ll probably need a hundred times that to buy a property and not a single penny of that will be focused anywhere but on one teeny weeny little piece of real estate on one street, in one town, in one country………

In my world that’s risky. And knowing that you need to borrow money to get good investment returns is risky with bells on! Yes, you’d have to be unlucky, but at the same time all that magic with mortgages we covered above could work in reverse leaving you in negative equity.

Pandemics can damage property investment returns. Just ask all those landlords that couldn’t find tenants during the Covid 19 outbreak.

Natural disasters can damage property investment returns. Just ask all those landlords that had to spend thousands on redecorating their properties after the recent flooding.

A change in government legalisation can damage property investment returns. Just ask all those landlords that had to change their cladding after the Grenfell Tower disaster.

Do I even need to mention problem neighbours or tenants?

It doesn’t take long to come up with an endless list of possible problems that the wrong buy to let could throw your way.

And think about this. Whose got to deal with all these problems? Not Buffet or Bazos but you!

Sure you may have a little help from your letting agent or managing company but let’s face it, the buck stops with you with anything remotely resembling trouble.

With shares, the worst that could happen is you loose all your money. It’s never happened before (for global) and it’s highly unlikely to happen in the future. But it could happen.

With property investment your balance could quite easily take a negative dive that’s both deep and quick if you aren’t careful.

All that said, if you have plans in place for when the proverbial hits the fan you’ll probably be able to ride the storms. The important thing with property is knowing what’s possible and planning for it.

So while the risk involved in property investment isn’t a showstopper, you have to admit index funds are less risky. A lot less risky.

Shares 2 – 1 Property

The bottom line

If you want to minimize investment risk or work involved choose shares, but if you want to maximize investment returns choose property (with a mortgage & some tenants).

Simple.