Stocks vs property UK for non resident investment

Stocks vs property is a big topic for everyone, but perhaps even more so for non residents because buying UK property from overseas isn’t the same as doing it where you live.

The fact of the matter is, you’ll have more to do. I think for most people most of the time its going to come down to one simple question:

What do you value more? Money or time.

It’s really that simple.

One of these two provides higher returns. The other one requires less work. (A lot less). All you have to do is decide which one you prioritise and you’re off.

Let’s get into it.

Have a look at Exhibit 1 below. It shows what happens to £100K if you put it in either stocks or property for 20 years.

Exhibit 1- Stocks vs property

Hopefully it doesn’t take long to see your money does a lot better in stocks than property.

FYI, your £100K ended up as £219K in property or £560K in stocks (more than double!).

Case closed, then.

Well not quite.

Whilst Exhibit 1 is based on serious research it’s not quite as clear cut as all that. Here’s why.

What investments returns can we expect?

Nobody knows what the future holds for stock or property market returns, particularly in the short term.

The most reasonable approach to take is the that of the professionals. That the long run historic average repeats over the very long term in the future.

In other words, we assume things continue.

If it’s good enough for professionals, then it should be good enough for us.

And by the way, it’s the approach I used for Exhibit 1.

So then the question becomes what are these long run historic average returns for stocks and property anyway?

The best research out there on stock market returns comes from esteemed finance gurus Dimson, Staunton and Marsh.

Based on their research it’s been about 9% for global stocks.

Why compare UK property to global stocks?

Now, you may be questioning the choice of global rather than UK stocks here. Shouldn’t I be comparing UK stocks to UK housing?

To which the simple reply is no.

Unless you are an industry professional whose research suggests the UK is going to outperform the rest of the world you would be crazy to invest in just UK stocks. You are essentially putting all your eggs in one basket.

You’d also be betting against the wider market which is 90%+ professional who’ve decided how much each country’s stock market is worth.

You might be right to go against them, but even if you are it will be nothing more than luck and you probably don’t want your long term investments to be based on that.

And by the way, it’s not like the old days when investing globally was tricky and expensive. Global index funds and ETFs mean anybody with a brokerage account can put money to work globally, cheaply, easily and tax efficiently.

All you have to do is add money to a global ETF whenever you have some spare and then sit back and enjoy the ride.

Going global with non resident investment

You’ll be invested with all the companies that matter across the globe and they’ll be working for you 24/7.

That is, unless you put all your money into property.

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

Between 1845 and 2016, UK home prices grew at an average annual rate of 3.8 percent.


LSE

I’ll round that up to 4 to make things simpler.

Remember, exhibit one that showed how much more money you’d have by investing in stocks than property. Now you know why.

Over the very long term UK property goes up 4% per year, and global stocks go up 9%.

Money compounding at 4% per year is really going to struggle to beat money compounding at 9% per year. (It’s impossible!)

In other words, stocks beat UK property hands down all day long.

That is, they would if it wasn’t for the fact that property investment returns don’t just come from house price growth, there a couple of other characteristics of property investment that we need to consider.

• The power of leverage
• The power of rental income

The power of leverage

Leverage, sometimes called gearing, but which I’ll call borrowing money is an essential component of property investment.

It works like this.

• £100K to buy a property that increases in value 10% gives you £10K
• £100K + a £300K mortgage from the bank to buy a £400K property increasing in value 10% gives you £40K

In other words, a 10% increase becomes a 40% increase for the simple reason you borrowed money.

Now, it’s worth pointing out a couple of important items about that before we move on.

• Fees, particularly mortgage interest mean you won’t get all that increase.
• Over time, the prices of most houses, most of the time go up. However, over the short term they can crash and all that magic leverage power can work in reverse. As long as you are in it for the long term and don’t take on a bigger mortgage than you can handle, you shouldn’t have a problem. Most people don’t. (Just be sure to speak to a good mortgage broker before you pull the trigger and make a purchase).

Rental property vs dividend stocks

Real property investment in the UK means buy to let. You buy a property (using leverage) and then let it out to paying tenants.

Tenants pay you rent which goes towards your investment returns.

Now, stock market aficionados will point to the fact that stocks pay dividends too.

Which is a good point. But there’s an important difference. You see dividends are included in stock market returns whereas rental income isn’t in property equivalents.

At least not usually, and certainly not on those big trustworthy datasets like the one that gives us our 4%.

There will be the odd smarty pants out there that points to a particular area of the stock market where dividends are higher and say I should be doing rental property vs dividend stocks analysis rather than comparing property to a global index fund or ETF.

Are dividend stocks a good non resident investment?

Now, I could wax lyrical about how the higher the dividend the crapper the company is likely to be. Good companies pay very small or no dividends at all, because they know they can get better investment returns by investing that money back in their company rather than paying it out to you.

If a company has money to pay out in a big dividend, that means they don’t have confidence in their own company’s ability to grow.

I could also point to the fact that a company’s share price will depreciate by exactly the amount they pay out in a dividend. The bigger the dividend, the bigger the price reduction.

I could also mention the fact receiving dividends is usually highly tax inefficient. You’d be better off selling off a few shares if you want money.

But I’m not going to do any of that. Instead I’m going to repeat the point I made earlier. Picking one type of stock over another, such as those that pay out high dividends, is a big call. You are essentially saying you know better than the wider market participants that are all highly educated financiers with the latest technology on their side.

My guess is you shouldn’t use serious money to make those kind of big calls.

In other words its 4-0 rental property vs dividend stocks!

What should I spend my rental income on?

OK back to the matter in hand.

The thing with rental income is this. It’s all over the place. It depends on a whole host of things, particularly property type and location.

But here’s the thing.

Most property investors will aim to cover their expenses with rental income and let the power of leverage take care of their investment returns.

At least that is what we should be aiming for when we are looking to invest our money in property.

If our rent covers our expenses we can sit back and let the full power of leverage work its magic in the background.

On the other hand if your rent doesn’t cover your out goings you’ll need to find money from somewhere else and every penny you find quite literally eats into your investment returns.

Don’t bank on it

Banks often lend up to 75% of the money to buy rental property, however that doesn’t tell the whole story.

You see an average pro landlord (4 or more properties) has borrowed 55% of the property value.

On the face of it, that seems low when they could have borrowed 75%. So you have to ask yourself why? You have to think most Landlord’s appreciate the power of leverage after all.

Now, some of them will have started owing 75% and then paid a chunk off over time, but even then you have to ask yourself why they don’t remortgage.

And of course, we’ve already touched on the reason.

Fee cover

You need your rent to cover all your fees. And as mortgage interest is often one of the biggest expenses, borrowing 75% doesn’t usually make sense. The numbers simply don’t work when you borrow so much. It means you have to find income from other sources to pay for everything, and you don’t really want to be doing that.

Experience suggests you should be able to find properties that work when you put down a third and borrow the remaining two thirds of the property value.

Not only does this method work well for me, but it is halfway between the 75% you could borrow and the 55% pro landlords are currently borrowing. (Well almost its 66.67%).

If you put down a third, and the bank lends you the remainder you are essentially tripling your returns.

In other words, our 4% becomes 12%.

More importantly our Stocks vs property UK investment returns in Exhibit 1 change a little.

Have a look at Exhibit 2 below. It shows what happens to £100K if you put it in either stocks or property for 20 years (assuming we borrow two thirds and our rent covers our outgoings).

Exhibit 2 – Global stocks vs UK property with a mortgage & tenants

Hopefully it doesn’t take long to see your money does a lot better in property than stocks when we take leverage and rental income into account.

FYI, your £100K ends up as just short of one million pounds in property vs £560K in stocks.

A slightly different picture to tenantless property bought with cash.

Stocks vs UK property for non resident investment – the bottom line

Here are the key takeaways:

• Property is usually a better non resident investment providing you use a mortgage and let it out.
• Stocks will usually beat a house bought for cash no matter whether it is tenanted or not.
• If you use a mortgage but don’t let the property out or vice versa the lines get blurred. My best guess is you’ll get similar returns to stocks. The key difference being you’ll have to work for your money so most people will probably be better with stocks in that case.