The Daily Telegraph - Saturday - Money

‘Should I invest or become a property tycoon?’

Tom Evans is building a buy-to-let empire but is it the best route to retirement riches? Sam Benstead investigat­es

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Whether to fund a retirement with property or shares is one of the great debates in financial planning. Advocates of the former argue that savers should own something physical that will grow in value with inflation – property has rarely let them down. Stock market enthusiast­s will say owning a basket of the world’s most important companies for minimal hassle and cost is a more efficient strategy.

Tom Evans, a 34-year- old assistant head teacher from Manchester, has thus far sided with the property pack. However, he is at a turning point in his personal finance journey.

On a combined salary of £115,000 with his wife, a civil servant, and with no plans to have children, the couple have built up a small buy-to-let business of two properties in Manchester. They also have £10,000 in cash and can save £600 a month.

“We started with one buy-to-let in 2019 after releasing equity from our £450,000 home,” said Mr Evans. “We bought a property for £50,000 and refurbishe­d it and now rent it out for £850 a month. We added another for £150,000 after getting an early inheritanc­e and now we rent that out for £850 a month – a 6.8pc yield. The total mortgage debt is £222,000 and payments are £650 a month.”

Their property investment­s, held via a company, generate about £12,000 a year after costs. Profits are left to sit in cash and the pair live off their employment income.

“The current plan is to wait for the cash to reach £60,000 before we buy a third property,” said Mr Evans. “This will take around five years. Then it should take three years to get the fourth, then another two and a half years to get the fifth, and two more to get the sixth.”

If this proves successful, Mr Evans believes that the couple could have around 12 similar terraced properties within 20 years. By this point, he will be 55 and ready to retire and live off the rental income.

Their defined benefit pensions will kick in around a decade later. Lifestyle costs are expected to be around £3,500 a month, adjusted for inflation.

However, Mr Evans has nothing invested in the stock market and is now wondering whether his best option is to own shares alongside,

Tom Evans has two rentals already and is considerin­g adding 10 more or instead of, property. “Is my plan to retire early on property income sensible?” he asked. “I am worried about putting all my eggs into one basket.”

Claire Walsh Independen­t chartered financial planner

Mr Evans and his wife are in a really strong financial position, but holding so much of their wealth in property is high risk. I would encourage the couple to invest in stocks and share Isas and personal pensions.

The problem with property is that there will be inevitable repairs to make and periods without tenants, alongside the potential for a market crash or deep recession that would cut rental income. They should cut their forecasts for income by 10pc.

Over the long term, stocks have performed better than house prices in Britain. Investment­s also give much greater flexibilit­y in terms of access to your capital and can be more tax efficient.

They should therefore begin to funnel their income from their buy- tolet properties into pensions and Isas, rather than building up a pot to buy more houses.

First, they can each withdraw £2,000 of dividends each year without paying tax. If it goes into an Isa, they can always put money back into the company at a later stage to fund future property purchases if they change their mind. They will pay no capital gains tax on it.

I wouldn’t recommend that they draw any more out: the dividend tax rate is 32.5pc for higher rate payers (set to rise to 33.75pc in April 2022). Moreover, they need to build up a buffer in order to cover any expenses.

According to the couple, they are able to save £600 a month from their salaries. This can go into their Isas as they have the £10,000 cash buffer, which they should keep for a rainy day. Making an effort to put more money away will increase their investment gains.

Together with the dividends, they could be putting £11,200 into Isas every year. As they are investing for the long term, they should consider investing in global stocks. Vanguard’s 100pc equity LifeStrate­gy fund has produced returns of 72pc over the past five years. Assuming annualised returns of 8pc, this would give them a pot of around £553,000 by age 55. They should not underestim­ate the power of compoundin­g returns: £ 553,000 left for another 10 years at an 8pc annual return becomes £1.2m.

Hayley North Chartered financial planner at North & Rose

For a simple retirement, many people avoid buy-to-let investment­s. The work involved, from finding tenants to carrying out repairs, is often not justified by the income they receive.

The Government is also clamping down on landlords, which has made second-home ownership more expensive. And although Mr and Mrs Evans currently own these properties using a limited company, there is no guarantee this will remain possible in the future.

They also need to prepare annual accounts and distribute any profits in line with shareholdi­ngs. Income is subject first of all to corporatio­n tax and then to income tax at each shareholde­r’s marginal tax rate, so when the couple sell either property, there will be capital gains tax to pay.

There is also a risk that interest rates rise, which would increase the cost of their loans.

However, investing in a mixture of property, savings, pensions and investment­s, such as those that can be held in Isas, diversifie­s risk. All of these assets, cash notably excepted, should generate a return above inflation.

Importantl­y, they’ll also not be forced to take income from property if rental values are low, or investment­s if stock markets tumble. With secure public sector final salary pensions from their employers expected to cover most or all of their core expenses in retirement, Mr and Mrs Evans have more flexibilit­y than most to invest as they see fit.

As they clearly enjoy investing in property, they should split their current surplus income, saving some towards another house and contributi­ng up to £20,000 a year each into an Isa invested in a range of investment funds.

This will deliver tax-free growth and tax-free withdrawal­s in the future. By retirement, these investment­s, alongside rental and pension income, will give them a strong portfolio to live off.

 ?? Tom Evans ?? ‘We bought a house for £50k and now rent it for £850 a month’
Tom Evans ‘We bought a house for £50k and now rent it for £850 a month’

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