Should I buy a second property, invest more or boost my pension?


In our Money Pit Stop series, we ask financial experts to give This is Money readers a free portfolio makeover.

Mike lives in London and is a marketing executive earning £32,000 per year. He started investing in funds in 2017 and now has a portfolio worth around £80,000 -most recently making a £15,000 profit after the market downturn caused by coronavirus.

Now he is about to swap his job for teacher training and is wondering whether to continue investing or buy another property for rental income.

Mike is considering buying a second property in Portsmouth, where he went to university, as he believes he would get more for his money than in London

Mike is considering buying a second property in Portsmouth, where he went to university, as he believes he would get more for his money than in London

The 27-year-old was lucky enough to get on the property ladder in 2016, when he bought his first home worth £270,000.

He paid a £130,000 deposit with the help of a non-repayable gift from his parents and took a five-year fixed rate mortgage of 2.18 per cent on the remaining £140,000, which is due to end in November 2021. 

He has an outstanding mortgage of £94,000 and is in no rush to pay it off due to the attractive rate. The mortgage term is 25 years. 

Mike is due to start a teacher training programme in September so will see his salary drop to £21,000 for a year, but says he has always been good at saving and also has an income through letting his spare room for around £650 per month.

Of his investments, around £45,000 sits in low-cost funds directly through Vanguard, and the remaining £35,000 is in shares using trading platform eToro’s CopyTrading service, where investors can mirror the moves of the platform’s top traders. He also has £10,000 in bitcoin.

He said he has no need for these savings just yet and would like to have as much as possible for when he eventually has children – hopefully, within the next five to ten years.

Mike’s goals are simply to maximise returns, be that through further investment in funds, stocks or even a second property. 

If he chooses the latter option, he is considering buying somewhere in Portsmouth, where he went to university, as he believes he would get more for his money than in London.

Mike’s savings and investments 

Risk appetite: Medium to high

Time horizon: Five to ten years

Shares: £35,000 through ‘copy trading investing’ via eToro

Funds, investment trusts and ETFs

£25,000 in Vanguard LifeStrategy 60% Equity fund  

£20,000 in Vanguard LifeStrategy 80% Equity fund 

Cash: Always keeps between £2,000 and £4,000 in his current account for emergencies

Properties: Home worth £270,000, outstanding mortgage £94,000

Premium bonds:  £5,000

Other: £10,000 in Bitcoin 

EQ Investors' Jeannie Boyle suggests Mike keeps his capital liquid so he can access it easily

EQ Investors’ Jeannie Boyle suggests Mike keeps his capital liquid so he can access it easily

Jeannie Boyle, director  and chartered financial planner for EQ Investors, writes: 

I would divide Mike’s savings into short, medium and long-term pots in order to protect him financially and achieve his goals. 

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His short-term savings will serve as his emergency fund, ready to access in case of unexpected expenses. 

He should work out what he spends every month and keep six months of spending in an account where he can get at it easily.

He already has £5,000 in Premium Bonds. These are effectively instant access, but he could consider the National Savings & Investments Direct Saver account which pays 1 per cent.

If Mike has other plans for the next three years for which he thinks he might need access to capital I would also recommend keeping this in cash. This makes sure he doesn’t have to sell investments during a market downturn.

The advantage of ready-made portfolios 

His medium-term money will be the money he intends to use in the next five to 10 years. He has already started investing by using Vanguard and eToro.

The Vanguard LifeStrategy funds offer access to ready-made portfolios of passive investments. These are a great option for investors who do not want to worry about asset allocation or stock selection themselves and both Mike’s holdings have consistently outperformed the sector average. 

There was no real difference in performance in March when global markets were in freefall. 

Mike could supplement his Vanguard investments by using a different style of ready-made portfolio. Various investment services offer this.

As an example of how it would work, our own Simply EQ service offers a ready-made portfolio of investments selected because of their potential for good financial returns and their positive impact on the environment or society. Investing in this type of portfolio would diversify Mike’s overall portfolio.

Be cautious of high-risk trading 

eToro is best known for cryptocurrency and contract-for-difference trading. You are often not buying an actual share, but a derivative that allows you to bet on the value of the share rising or falling without taking ownership of it. 

It is also possible to buy and hold shares through eToro. 

If you are an experienced investor, trading with money you are happy to lose this might work well for you. The CopyTrading service is designed to help those with less experience, but it can be hard to be sure what exactly you are copying.

Mike has more than 20 per cent of his assets invested with eToro – a very high proportion to hold in such a high-risk environment. If he enjoys using the site, I suggest he carries on, but reduces his exposure to a maximum of five per cent of his assets.

Mike has made £15,000 since the March downturn by 'copy trading' via the eToro platform

Mike has made £15,000 since the March downturn by ‘copy trading’ via the eToro platform

Think earlier about later life 

Over the long-term, Mike needs to think about his pension. Any money he can contribute now will benefit from compounded investment growth over the next 40 or so years. 

Retiring might not be at the forefront of Mike’s mind now but switching some money into his pension might take the pressure off his income in the future. Many people find their expenditure is peaking at the same time they are starting to think seriously about retirement.

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I would suggest he checks what options he has via his employer pension. Some companies will match increased personal contributions. This would be a good way for Mike to use some of his surplus income each month.

Most company pension schemes have a default option plus some other funds you can select for yourself. It is worth investing a few hours looking at these options to make sure they are right for you. 

People like Mike who have many years until retirement are best served by investing a high proportion of their pension fund in shares. The default fund your employer has selected may not take this into account.

In terms of consolidating his pensions once he starts his teacher training, if Mike had previously been a member of a public service pension scheme, he might have been able to transfer this into the Teachers’ Pension Scheme. Otherwise, he’ll have to keep his new teacher’s pension and personal pension separate. 

To buy-to-let or not to buy-to-let? 

Fittingly for someone who works for an investment firm, Jeannie believes Mike is better off keeping control of his capital by investing rather than buying a second property. 

Jeannie says: Buy-to-let can be a good way to generate additional income in addition to capital growth, but tax changes have reduced yields for most landlords. 

It can also be difficult to extract your capital once it is tied up in property which may not suit Mike.

He is hoping to start a family in the next five to 10 years but the arrival of a family is notoriously difficult to time, so I would suggest Mike keeps his capital liquid so he can get at funds when he needs them. 

If he decides he wants to take a year out or his family arrives sooner than expected, he will still have access to his money.

Mike is thinking about buying a second property in Portsmouth, where he went to university

Mike is thinking about buying a second property in Portsmouth, where he went to university

Alternatively, Josh Memour, director at independent mortgage advisor Eternity Home Finance thinks homeowners looking to buy a rental property should make the most of the recently announced stamp duty holiday.

However, it is also worth noting that while this can save a prospective landlord a maximum of £15,000, almost all forecasters, including the Office of Budget Responsibility and Bank of England, predict house prices to fall over the next couple of years as the impact of lockdown on the economy and job losses bite.

Josh says: The recent stamp duty changes are not only affecting homebuyers, landlords can save money too. The three per cent surcharge still applies but so does the recent discount on the original charge, reducing the up front cost of starting your property portfolio.

Purchasing additional rental property can be an excellent investment, especially in areas of the country where there is not enough housing to go around. Whilst rental income may not be as profitable as it once was, one should not let the great be the enemy of the good.

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The key is to invest in property in the right area where the property price can look likely to be upwardly mobile in the medium-to-long term, and where rent is not proportionately cheap compared to the cost of the mortgage.

Popular investment areas over recent years have been in coastal towns and cities which have good train links into London. 

Brighton especially has seen major house price growth over the last decade as those seeking to move out of London look for desirable places to live that are still accessible from their workplace.

Other areas such as Eastbourne and indeed Portsmouth are now being looked at by investors as the next place that could pull off the same trick. 

Property prices are currently much lower in these areas and rental yields can be good if the property is well located. 

The information provided by our expert is for the purposes of this article and is not personal advice.

If you are at all unsure of the suitability of an investment for your circumstances please seek advice.

Nothing in this response constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.

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