It’s been a while since my last post. I have been overwhelmingly busy at work. Evenings and weekends are really hitting me hard. It’s hard for me to get the time to come home and write. I logged in to WordPress to see the number of hits this morning and realised that while I was taking a break from writing you guys have been reading a lot so I decided to finish up one of the many posts I had in draft. Enjoy! Things are easing up so I will be publishing more content. And more updates on my progress towards FatFIRE – some interesting revelations to come…
I’m going to sound a little controversial (although anyone who has been following me on this blog knows all about it).
I like Property!!!!!
YES. I am in love with Property and I am not ashamed to come out and tell the FIRE Community that I am!!!
And YES. Last year I blogged that FatFIRE Mum and Dad were going to spend 2021 re-balancing the portfolio to be more 2:1 Property to Stocks.
This was not to be. The bricks have enticed me. In fact, I’m soo bullish that I’m willing to sell out my stocks to fund the investments. I’ll explain why.
Benefits of Property for FIRE
Although FIRE is very much about Stocks and Shares, Index ETFs, Global Diversification, Automation and Pound Cost Averaging. A lot of the FIRE media shies away from Property but I would say that we should embrace it. Let’s have a look at some of the key features of a Property Investment and compare Property and Stocks.
Regular ETFs and Shares will give you a combination of Growth (as the value of the companies being tracked increase over time) and Income (through Dividends and Coupons/Interest – if you are invested in a Bond or other Debt).
Let’s say you are stock picking (not advisable unless you know what you are doing) and you have £100,000 to spend. Let’s go with Vodafone as its a FTSE darling.
£100,000 will buy you around 790 shares in Vodafone listed on the London Stock Exchange. On average the Dividend is around 8p per share. This means that for 790 shares you get £6320. This is a return of investment of 6.32%. Sounds pretty decent. Almost better than some of the properties I own, yet less hassle (no toilet seats to fix).
But that’s not the whole story. If you had bought Vodafone on Jan 2011 (10.5 years ago) you would have lost 30% in value by now. So your £100,000 investment would be worth £70,000. This coupled with the erosion in value due to inflation doesn’t seem that great – especially when we have gone through one of the biggest bull markets in history! Not looking good so far!
Before you comment and say “you chose a stock that was losing value and its a bad example” and that this is why you should buy the index yada yada yada… Yes I agree. But not all of the index has high dividend paying stocks. The FTSE 100 dividend yield was expected to be only 3.2% for 2020.
Everyone will now shout out and say that Property Yields haven’t done any better. Average UK Property Rental Yields were 3.53% in 2020. Yes yes yes, but…
The main difference is leverage! Typically when buying property the average investor is able to understand and apply for a mortgage to gain leverage. A 25% deposit (typical Buy to Let mortgage deposit AKA 75% Loan-to-value) provides a 4x leverage on your investment. But because of debt repayments and fees associated with the purchase, in reality the Net Return on Investment (the equivalent of Dividend Yield) is around 4.2%. This is better than Stocks and Shares!
Don’t get me wrong, you can definitely get leverage bets on the stock market. There are futures, options, CFDs and spread betting platforms (and many more exotic products for seasoned investors and institutions). I know people making good money on leveraged investments. But you need to go over a learning curve and have Diamond Hands (see further down) to be able to hold these assets through the volatility in the markets (basically any movement will be amplified nX, meaning that you may stand to lose more than you put in very quickly and not many people have the heart to stick around).
Refinancing, Reinvestment and Belief Systems
Carrying on with the leverage and mortgage theme… Property investors again have the ability to re-adjust their leverage through refinancing. If the value of the property increases, you can remortgage the property to unlock some of that increase. This can then be used to invest in another property or provide an income for you to live on (great retirement strategy – I will cover this in a future post).
But this is IF and ONLY IF the property increases in value! Re-financing to take your investment out and grow your portfolio is based on the assumption that property market increases in value over the long term. A lot of readers will now chime in with various horror stories as to how so and so lost so much money etc etc. But I ask you this: If you have enough space in your belief system to believe that Stocks and Shares will appreciate on average 5% a year (Adjusted for inflation) and you can live off of an SWR of 4% (AKA the FIRE movement) than I am sure that you can believe that Property as an asset class could do something similar. Property market research suggests that (adjusted for inflation) average prices have increased by 225% since 1975. That’s not bad!
If you can believe Stock markets, you can believe in Property markets too..
Growth by adding value
As we have seen from above, growth is common in both Stocks and Property.
BUT with one key difference: you cannot, as an individual investor, increase the price of the stock with your own actions (unless you are r/wallstreetbets or Gordon Gecko muscling your way into the boardroom).
Whereas, with Property you can renovate, upgrade, improve, fix, extend, re-paint, re-class etc. etc. There are a number of things you can do to increase the value of your rental property.
You could go as far as converting a commercial property into a residential property; making a property into a hotel; creating a multi-occupancy/HMO property; turning an office block into a block of apartments… the list goes on. So many options and opportunities. They certainly require time, money and effort but they can really add value and grow your property value massively. Can you do this with your Vanguard Global Growth ETF?
Everyone now knows Elon Musk’s famous Diamond Hands tweet about his ability to hold onto the Bitcoin Tesla bought through choppy markets. Diamond Hands are a MUST for any investor. Especially, in highly volatile markets. Crypto is one where one must have, not only Diamond Hands, but other Diamond parts to match.
Stock Markets are very volatile and partly that is because they are (in todays world) very easy to access for everyone. Whether it is via Robin Hood or Hargreaves Landsdowne, you have access to the market on a phone. You see your favourite stock, ETF or Fund falling and you press the red sell button and close off your position. It takes seconds. Its that easy. Then you miss the pump/the upswing/the recovery and you live in regret that you sold on the dip. Its a story that many of my trader friends have sobbed about (becoming a daily thing).
Property, however, doesn’t require Diamond Hands. Buying a property takes 3 months. Selling a property takes 6 months. In a property bear market both of these processes take EVEN LONGER. The entry and exit is so hard that the chances of you slipping up and pressing a Red Button are next to impossible. You cannot! It prevents speculators from jumping on the bandwagon in the same way that it prevents investors from slipping off the bandwagon.
A lot of readers will be thinking: but I invest in ETFs, Diversified Vanguard Funds, etc etc. This doesn’t impact me. If it slips, I will wait.
When the US Stock Market crashed between 2007-9, due to sub-prime, the correction lasted 18 months and the market lost 50% of its value. How many of your sitting there could sit there watching your £1m S&S ISA that you built so proudly over 15 years fall to £500k without twitching a finger and thinking of cashing out?
Property Investors don’t need Diamond Hands!
So that is why I love property and why I will continue to buy property as an asset class for my FIRE portfolio.
One word of caution: never go all in. Work out a ratio. At the moment with the investments I’m making, it’s tending towards 1:1 Stocks to Property. For some people this is too high. At the least, especially as most of you reading will be in the accumulation phase of your journey, you should be looking to have some exposure in property. Try it, and see if it’s something that you can handle. Then increase your exposure up to your comfort level.
I will be putting together some spreadsheets and uploading them so that you can value property investments and work out how much of your portfolio should be in property to accelerate your FIRE.
We will also be looking into how to buy and some resources for investors. Stay tuned…
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