By Tim Collyer, Chartered Financial Planner at Montgomery Charles
In the realm of wealth-building, the debate between investing in rental properties or plunging into the stock market is a tale as old as time. My latest collision with this financial conundrum began one frosty Easter Monday, amidst the chaos of holiday preparations, when a distress call from my tenants turned a routine day into a moment of epiphany.
There I was, setting up the dining room for expected guests, when the phone rang. My tenants were on the line, stranded in a cold house with a heating system that had given up. On arrival, I discovered the issue was as simple as a misplaced cup of tea obstructing the heating’s power switch. A quick fix, but it sparked a question: Was the hassle of property management worth it?
This incident led me to scrutinise the financials of my own property investment. While the allure of capital growth and rental income is undeniable, the reality was stark. After accounting for all costs, the net rental yield had dwindled to a mere 3%. Coupled with the obligation to a higher rate tax on the rent, and the evolving landscape of landlord responsibilities, the scales seemed to tip.
Around the same time, I stumbled upon an intriguing piece of information: had Donald Trump invested his inheritance in the S&P 500 instead of his hotels and other real estate, he would have been wealthier. This prompted me to conduct my own analysis, comparing the growth of average house prices against the S&P 500 over the past 11 years. The results were eye-opening: the S&P 500 outperformed the property market significantly, even when considering the additional income from rent.
The S&P figure includes dividends, and the average house price figure does not include rent. But having said that, over the 11 years in question, returns from the S&P were 162.5% compared to the average house price index at 73%. Even allowing for a more diversified portfolio returning less, this still looks good.
The world of investment is not one-size-fits-all. Each property and each stock portfolio carries its unique set of variables. Yet to me, the trend was clear – the stock market, particularly the S&P 500, which represents a substantial chunk of the global market, could offer a more attractive return on investment.
The evolving regulations, the mounting responsibilities of landlords, and the sheer unpredictability of property management began to outweigh the benefits. It was time to reconsider my investment strategy.
Perhaps you’re reading this and thinking: “But surely not everything is market-driven? Isn’t the decision to put up with the trials and tribulations of property ownership, in part, a personal choice?” And you’d be right to think that.
Or perhaps you’re thinking: “Ok sure – I might make slightly less than I would on the stock market. But at least I’m dealing with something tangible – I can feel the bricks and mortar under my fingers”. And you’d be right to think that, too.
The point is: every financial decision is dependent not just on trends or the (fiscal) winds of change – it’s dependant on the individual. How much do you embrace risk? How much money do you currently have saved away? Is that enough? Are your future plans and dreams something you’ve thought about deeply, and if not – why not?
So, if you’re standing at this crossroads, pondering whether to dive deeper into the property market or to explore the vast ocean of stock investments, let’s have a conversation. Because getting help with your financial planning doesn’t just give you better clarity on what the future looks like – it can actually be the catalyst that makes that future a reality.
If you think you’re ready to have an informal, no-strings-attached chat to explore what the future could hold for you, book in a session below. I look forward to speaking to you.
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Sources: S&P 500 historical data, Yahoo finance; UK house price index, ons.gov.uk. Any money invested carries an element of risk and you are not guaranteed to get back the money you invested. This article does not constitute advice and you should consult your financial adviser prior to any action.
