Hey friends,

I'm waiting on deliveries of materials so there's not been much DIY action this week. The lull does however present a good opportunity to explore property investing, though upon re-reading I may have sucked all the fun out of it. Sorry about that.

🎥 Video

Moving forward with the studio vids, I got this one out. I kept it brief because how many times can I explain vapour barriers and breathable membranes without one of us getting bored? However I do mention something new that applies to wool-type insulation - wind washing.

Apologies for the shaky video at the start, bit amateur of me.

All the materials for the wall lights have finally arrived. At this point after taking so long figuring out what I needed and how it will all fit together, I'd have almost certainly been better off just buying the damn things but you know what, it's not about that anymore. It's about me versus electricity ✊. Will I prevail? Will I get electrocuted? Tune in next week to find out...

🏗️ Your Builds

I've been adding more of your finished garden rooms to the website lately and there are some incredible ones including Toby's shepherd's hut and Dan's deck-on-stilts. I think all garden rooms are awesome, big or small, low cost or opulent but I must say I am blown away by Arthur's. It's a work of art and he created it with no previous building experience:

Somehow he credits my series as his bible though his quite clearly goes way beyond what I achieved but I guess it was just the nudge that he needed. Get the basics down, see what's possible and let your imagination take you the rest of the way.

You've seen from this newsletter that I don't think about garden rooms 24/7, but I still love them and two things come back to me time and again:

1. Despite there now being a multitude of videos and explanations on how to do it, I still find it incredible that pretty much anyone, even with no experience, can build what is essentially a small house all on their own.
2. If you're looking to get started with DIY, there's no better first project. While it can seem daunting at first, you learn so much: timber framing, span tables, roofing, window fitting, tiling, flooring, insulation, U-values. The list goes on. Plus you can do it all in your own good time without disrupting your home.

I've got a few more finished builds to put on there but if you have a decent series of photos that you would like to have showcased, do get in touch. These are the most frequented pages on the website for good reason, they inspire and encourage others.

📈 Property Versus Stocks

Who doesn't like to be bombarded with numbers on a Wednesday morning? The detail of how to properly analyse the return on investment from a rental property will probably only be of interest to a small number of you but hopefully the conclusion will of interest to many, so feel free to skip to that.

I've been wanting to get round to this topic for a while as I think that, alongside stocks, property is one of the best asset classes you can invest in. In my stock investing newsletter I pointed out that there is a lot more work and knowledge required to invest in property when compared with stocks and therefore the rewards should outweigh stocks'. It's been a good while since I've run the numbers so I wanted to see how well property stacks up with current prices.

To provide us with an anchor by which to compare, we can use the long term average (since 1957) of the S&P500 which sits at around 8%, which I believe includes dividends paid out.

Over a similar timeline (1952 - 2017) the average increase in UK property price has been 2.2%. This doesn't include rental income but we'll use this figure for growth.

For our comparison we'll assume our investor, Jimbo, has his stocks within an ISA contributed to with post-tax income and benefitting from tax-free growth. The property investment will be in Jimbo's own name rather than in a company (affects mortgage rates and taxes) and he is a lower rate tax payer (to avoid complications with section 24).

First Jimbo needs to find a property to buy. He choses this 2 bed 2 bathroom apartment in Leeds city centre, listed for £220,000. Looking at sold prices, it seems to be in the right ballpark but since it's been on the market a while Jimbo manages to knock £5k off the asking price and gets it for £215,000.

He knows that the power of property investment is all in the leverage so he takes out an interest-only buy-to-let mortgage for 75% LTV of £161,250 and puts in the remaining 25% of £53,750 as a deposit.

He choses a 5 year fix through a fee-free broker at 1.75% and adds the upfront fees of £2,239 to the mortgage total and so his monthly mortgage will come to £238.42

As Jimbo already owns his own home, he'll be paying higher rate stamp duty of £8,250. He also needs to pay conveyancing fees of £1,500.

To buy the apartment Jimbo has put in:

£53,750 deposit

£8,250 SDLT

£1,500 conveyancing fees

Total £63,500

The listing claims that rental income for the property will be around £1,000 a month. Jimbo instructs an agent which finds tenants willing to pay £950 a month since the property isn't in tip top condition. Each year gross rental income = £11,400

In the first year Jimbo has to account for the following outgoings:

£2,861 on his mortgage

£366 ground rent (according to listing)

£2500 service charge (according to listing)

£1,368 management charge to the letting agent (10%+VAT)

£400 letting fee and gas & electrical safety certificates each year

£570 towards long term maintenance of the flat's internals (5% of rent)

Total £8,065

£11,400 rental income minus £8,065 costs = £3,335 gross profit.

After Jimbo pays 20% tax on this he's left with £2,668.

The property has also risen in value by the the long term average of 2.2% = £4,730.

£2,668 + £4,730 = £7,398

£7,398 as a % of his £63,500 initial investment = 11.7% return on investment. He's pleased as he's beaten stocks by 3.7%.

---

Let's now see how well he'd have done in each scenario after 20 years when we take selling costs into account.

The stocks in the ISA are easy to calculate. £63,500 compounded at 8% over 20 years comes out a total of £295,971, all tax free.

The apartment at 2.2% compounded growth would end up valued at £332,243. After selling costs of a 1% estate agent fee and £1,500 for legals (both allowable capital gains tax expenses) Jimbo would be left with £327,421.

The mortgage, after four product fees, also an allowable CGT expense, would stand at £170,566. Jimbo's equity would be £156,855 (£327,421 - £170,566). Before paying capital gains tax, Jimbo can also deduct the initial stamp duty and legal costs from when he bought the flat along with his yearly capital gains tax free allowance of £12,300 = £134,805.

By now Jimbo has retired and has purposely not taken income from his pension this year but does have income of £12,500 from elsewhere that takes up his income tax free allowance. That means he'll pay 18% CGT on £37,500 (£6,750) and 28% on £97,305 (£27,245) totalling £33,995 of CGT. £156,855 minus £33,995 = £122,859 - that's Jimbo's profit from capital gains. Phew!

Now, Jimbo has also been receiving rent for the last 20 years too which will have gone up over time but so will have his expenses bar one - the mortgage.

To make this easy we'll take the average amount - at the 10 year mark - and multiply by 20. So yearly rental income increasing at 2% per year would reach £13,896 and costs would reach £9,204. After tax profits would be £3,754. Over 20 years that's £75,080 post-tax rental income.

Conclusion

Total profit from stocks investment = £295,271

Total profit from the apartment = £197,939

Wow. I'm honestly quite shocked at the difference once taxes are taken into account. Stocks would appear to be the winner. There are of course a million and one caveats such as:

• What if property prices increased faster. After-all they have done a more impressive 3.8% since 1995 and 10% over the last year (when leveraged as per the example of above that would be a 34% ROI on capital growth alone). That changes things well in favour of the rental property. Also these %s are average property prices. Leeds is in a good position for above average growth.
• What if Jimbo had invested the rental income over the years into stocks.
• The investment property could have been much better picked (I spent all of 5 minutes looking) for a higher rental yield.
• I was testing a simple buy and hold strategy as that's more akin to stock market investing but more adventurous strategies like HMOs, serviced apartments or adding value through extensions/renovations would likely give higher returns.
• Jimbo could have refinanced earlier to pull equity out of the property to invest in another property or stocks.
• The stock market has had a very good decade so could be in for lower than 8% growth going forward.

So by no means am I writing off property as an investment but with property prices and rents where they are, I feel it shows you can't just pick up any old (or new) property and expect it to make killer returns. To make it work it relies on solid capital growth. How likely is that going forward? Well we know about the property cycle but what are the economics driving it, that's what I want to explore next.

👋

There's an owl screeching outside so it's time for bed!

Hit "reply" if you've got any comments on this week's newsletter – otherwise I'll see you next time. Have an epic week :)

P.s. If you think a friend will enjoy this newsletter, feel free to send them this link where they can sign up.

P.p.s. You can find all previous newsletters here.