Hi all

My situation: I own my property outright with no mortgage. I do not plan on moving houses any time soon. The house is worth around 420k and I have around £200,000 investing in a very diversified low cost index fund. I am around 90% stocks 10% bonds. I pay around 0.3% a year in charges.

I probably should not guess the market but over the long haul (I am never selling and will keep investing) I am going to guess I will average around 9% a year after costs. Anyway, I also have around 300k in cash.

London (UK) is considered a safe haven. Property over here has gone up so much but just keeps going higher. Foreign investors are here and many British citizens can't afford to live here. I know this can look like a bubble if the foreign investment pulls out but I can't really see that happening any time soon. Recently our PM said he wants to make offshore shell companies become more transparent (since the super rich foreigners are using London to hoard their illegal cash and want to remain anonymous) but I am not sure he will since it could potentially cause prices to fall.

Should I put the 300k into maybe 3 properties valued at around 400-500k each? I could put 100k down on each and get a mortgage on the rest. I can get around a 7% roi a year in rent and of course, the potential gain in price in the property. I am looking at this from the point of view of around at least 20 years. It is also easier to buy more and more properties when you start getting a few. I know this was the game to get into years ago and people became filthy rich, but the property market in London has always been solid. The alternative is for me to put the 300k into a low cost index fund like I am now, which will be very diversified.

Thoughts?

Yes, buy some real estate.

I don't think a bank will let you carry 3 mortgages with only that much collateral and down payment split 3 ways.

25% deposit BTL mortgages are available, assuming he meets the other criteria for them.

If you have the risk tolerance to leverage returns one of the worlds most inflated property markets in the world then go ahead. There is still upward rent pressure so you could make a solid return over the short to medium term. Long term wage growth hasn't kept pace with the rent costs, something is going to have to give, the general workers can't afford constantly rising rents.

Lol @ getting 7% anywhere in London outside of slum landlording in the horrific parts of East/South. What area are you looking at to get these numbers at that price range?

This number is more like 3% (if that) in all areas that have sound chances of increasing in value, and sub 1% in the hyper 'secure' central western suburbs (people conveniently forget many parts of even these were utter holes 20+ years ago, and hold quite high chances of becoming again with the right demographic/fashion changes).

This is all pre the huge transaction, leverage and maintenance costs. And general cost/hassle of looking after and recruiting decent tenants in a very fast turnover market - which is also substantial.

Then, provided you survive massively leveraging up for years in one of the most bubbling and competitive renters' landscapes in the world, you gain a load of inflation value and maybe a bit of real, which you then get to pay massive capital gains tax on.

It's basically return free risk as the numbers currently stand.

One of the world's biggest real estate bubbles, already well past the point of rental affordability ("fundamentals") + laughably unrealistic rental ROI + leverage. What could possibly go wrong?

Is this some kind of elaborate troll?

You have close to a million pounds under your belt, and you want to do leveraged investing in a market which:

a) is not going to make a meaningful difference to your worth and
b) has negative long term return
c) Has at least a 20% chance of wiping out your entire wealth and losing you everything including your home in the next 10 years.

Are you mad? This is basically a 20% bet on going from a million pounds to homeless. All for largely meaningless upside (100% at best? Probably not close).

I want you to read your own words again:
This is possibly the dumbest investing decision you could ever make.

I do think London RE is in a bubble. But it may be the most resilient housing market in the world.

Personally, I think it would make sense to have some RE exposure beyond your domicile given that all your other investments are in the financial markets.

This may be more work than you are interested in. But if I wanted to invest in RE I would go where the growth is rather than chasing momentum in London. South American and SE Asia stick out in my mind. There could also be really cheap stuff in Greece.

Were I you I would rebalance my portfolio. There is a difference between selling to get out (which you don't seem to like) and selling to rebalance. Markets go through swings its just responsible risk management to rebalance as asset allocations get skewed due to extreme price movements. Also, there is a ton of risk in the markets right now.

I think if I were you I would do the following:
1. underweight equities in the current environment
2. put about 5-10% of AUM into physical PMs (gold, silver, platinum)
3. about 10-20 % in gov paper (UK / US doesnt matter, but I wouldn't want EUR bonds)
4. The rest in RE (or a little less and (private) small business exposure)
-I would maybe go for one more property in the UK and then whatever is left I would put into a place with growth. Maybe take a vacation, close a few deals and find a property manager. You will be parting w/ like 10% a month to the property manager but will have next to zero work, cash flow, and exposure.

If you have a LT investment horizon I just wouldn't want to have all my capital in an index fund and something like London RE. You are too invested in the status quo IMO, especially given all the risk that is out there over the next, 5, 10, 20 years.

It wouldn't hurt to buy a little BTC as well.

I forget where I heard this, but someone said diversification is the only 'free lunch' in investing. Whether or not they are technically right, the point is still valid.

London's bubble will burst soon enough. The same tired arguments are used in every bubble, about why this particular bubble is immune to basic economics. Leverage, speculation, and lots of people chasing assets that have already increased a ton ALWAYS leads to major losses. Not usually, ALWAYS. There has never been a case in world history where it hasn't.

Yeah this is like the worst investment you could make. Here's a read about the buy-to-let bubble in England.

Add to that the fact that rental yields are 3%, which is already well above affordable levels for renters.

OP, supposedly a sensible fellow, wants to buy into this mess. With leverage. I think my 20% estimate of losing everything including his family home is too low.

Prices and rents will likely correct heavily down at some point, and stay depressed for years. Meanwhile OP owes more than his properties are worth, leveraged, while rates go up.

Do NOT do this!!!

I know it is highly regional but what are your thoughts on the US real estate market outlook over the next 3-10 years?

I definitely think it is at the top of the growth cycle but not sure if that means hard crash or soft landing.

No idea.

Rika is right, please do not sacrifice this money trying to get rich.

Not in London if you don't know what you're doing real estate wise, or don't know how to find mispriced properties. You won't get a 7% net yield at all.

I say you look for the right companies to short. Should balance you out nicely.

Thank you for the advice all. I have decided not to do this.

It is good getting advice from those abroad since EVERYONE here is obsessed about getting property and people never stop telling me to get in on it and that I am mad not doing so. I guess these are all the classic signs of a bubble. London housing seems so resilient though, the increasing population with a huge demand for London, along with low rates etc, has led to many making money.

I guess I was thinking about something else to invest in since I am all in indexes right now with Vanguard. There might be a low return for many years but that is better than losing my money.

It's classic end stage bubble. Everyone is panicked to get their money in because all of their friends are deep in the market and making money every month. Even your taxi driver and hairdresser are getting rich and telling you about it. Sensible people lose their heads and put all their net worth - levered - into an obvious bubble.

These are the bagholders that pay everyone else off. Congrats on not being that person. You made an extremely good decision. London is unable to go much higher, and has a long way to fall, and rapidly, once the bubble pops, which it will.

Yup.

Thanks again for the replies, much appreciated!

If you want to diversify investments, Australian banks pay 6-8%/year in dividends, with 30% tax already paid which you can claim back. And the Australian dollar is fairly cheap right now, near historical levels. It's also a very good hedge against another GFC type event.

http://www.nydailynews.com/news/nati...icle-1.1796606

http://www.theguardian.com/business/...P=share_btn_tw

I don't think there is enough talk about this. You think the 08 housing bubble was bad? Wait until the housing market crashes when all of the traditional middle class is unable to afford home-ownership because they are strapped under the weight of student loans. This student loan debt bubble is going to have serious ramifications as time goes on and we haven't even gotten close to the peak yet. Student loans surpass mortgages when Boomers start dying off and Millennials with too much loan debt to have bought a home outnumber them.

Also worth noting on the population/demand point, that virtually all major cities - and especially London - are unbelievably modular and able to be scaled up and down in size very fast. There is surprisingly little population demand other than how quickly people can convert large properties into small flats (and vice versa in some areas/times). While this can increase property values, its no way near as severe as people/the press think in terms of its capacity to absorb rising populations: everyone just pays a little bit more for a lot less space/flees to the commuter belt during boom times.

Its also worth remembering that as many people basically buy to their budget with houses (eg they think, 'I can get 500k, what's the best I can buy?' over 'I want a three bed semi, what's the cheapest I can get?') London is unbelievably dependent on a surprisingly small amount of movement at the nosebleed house prices. It didn't take many of the former 100 million houses to be selling for sub 50 million in the credit crunch for huge waves to ride down the scale as everyone suddenly realises they can get a lot more for their money than they initally thought and the former 'normal' becomes much lower all round. This makes it much more risky that it first seems, as your fate can easily be in the hands of a very thin sliver of the London population, many of whom live very volatile lives, especially during economic crisis.

im no expert on the london market but i basically disagree with all of this

afaik the cities with diverse economies and international appeal dont really have massive bubbles like people are talking about here. the bubble in the states was created by joe the plumber in some random town with no international appeal. london isnt detroit or arizona

how did new york do during the real estate crash? the city employs a ton of people directly impacted by the finance markets that took a nose dive. how did new york real estate react?

the 50 and 100 million dollar real estate transactions have little to no trickle down effect in places like london or new york. 99.99999% of the market are completely unaffected. the price is elastic on those properties and they are for the handful of billionaires to deal with. it has almost zero impact on the london housing market other than the fact it may reflect it

again im no expert on london real estate or the current situation but i havent seen anything itt that makes me think theres a bubble. i could be convinced its not a good investment but i havent seen this bubble people are referring to

there are simple principles. land is scarce. demand is high. what is going to change that? london pools from international buyers. if demand cools they will slow down development. is there some sort of bubble in the london economy that will collapse and people will have no money for rent or mortgage? are international buyers going to suddenly change their tune about london? is london going to stop being an international destination?

london might slow down, cool off, stagnate, regress a little, etc. i really dont know enough to form a solid opinion but i havent read anything that leads me to believe theres a bubble. i think if you can net 7% in london you should buy, but i dont believe that either

It collapsed by ~30% to the level it was in the late 80s?:



Caveat this by saying I have no nuanced knowledge of the NY market so may be flaws in this - seems to be a common graph across a lot of sources but glad to listen to anyone with a lot of experience of RE in the city/why the above is total garbage etc.

Tokyo?:



Again, can't speak for NY, but many of the London houses that are currently in 50m+ vogue were in total holes even 20-30 years ago: Chelsea and Notting Hill in particular. Much of the housing stock is intrinsically no different from hundreds of other areas with vastly different values. Its not a game at all insulated from ordinary people over any time-scale - its just a location based fashion merry go round that can suck in even people on very low incomes very fast under the right conditions.

I'd also possibly challenge these simple principles you make as well, although I agree with some of them. I can't see any of these being poor arguments about buying property in Tokyo in the late 80s, for example.

Before we get into the semantics of what constitutes a bubble too, I would happily concede London was a way away from Tokyoesque madness (and if anything has cooled off quite a lot in recent months, looking somewhat dampened by the changes in stamp duty on houses above 937k), but the investing strategy outline by OP at the time was clearly very high risk/low reward and should have been advised against in strong terms imo.