“Should I have 12 rentals or invest in an Isa?” “
Whether it is to finance a retirement with property or stocks is one of the great debates in financial planning.
Proponents of the former argue that savers should own something physical that will rise in value with inflation – real estate has rarely let them down. Stock market enthusiasts will say that owning a basket of the world’s largest companies with minimal hassle and cost is a more effective strategy.
Tom Evans, a 34-year-old deputy manager from Manchester, has so far sided with the property pack. However, he is at a crossroads in his personal financial journey.
With a combined salary of £ 115,000 with his wife, a civil servant, and with no plans to have children, the couple set up a small business to buy and rent two properties in Manchester. They also have £ 10,000 in cash and can save £ 600 per month.
“We started with a buy to let in 2019 after freeing up the equity in our home of £ 450,000,” Mr Evans said. “We bought a property for £ 50,000 and refurbished it and are now renting it out for £ 850 per month. We added another one for £ 150,000 after getting an early inheritance and now we are renting it out for £ 850 per month – a yield of 6.8 pc. Total mortgage debt is £ 222,000 and payments are £ 650 per month. “
Their real estate investments, held through a company, generate around £ 12,000 per year after fees. Profits are left in cash and the couple live on their employment income.
“The current plan is to wait until the money hits £ 60,000 before buying a third property,” Mr Evans said. “It will take about five years. Then it should take three years to get the fourth, then another two and a half to get the fifth, and two more to get the sixth.
If that turns out to be successful, Mr Evans believes the couple could have around 12 similar terraced properties within 20 years. At this point, he will be 55 years old and will be ready to retire and live on rental income.
Their defined benefit pensions would come into effect about a decade later. Lifestyle costs are expected to be around £ 3,500 per month, adjusted for inflation.
However, Mr Evans has not invested anything in the stock market and is now wondering if his best option is to own shares alongside or instead of the property. “Does my early retirement plan on property income make sense?” ” He asked. “I worry about putting all my eggs in one basket. “
Claire Walsh, Independent Certified Financial Planner
Mr. Evans and his wife are in a very strong financial position, but holding a large portion of their wealth in real estate is high risk. I would encourage the couple to invest in stocks and share Isas and personal retreats.
The problem with home ownership is that there will be inevitable repairs to be made and periods without tenants, alongside the potential for a stock market crash or deep recession that would reduce rental income. They should cut their revenue forecast by 10pc.