What to do with a lump sum (in the UK)? Buy own flat or invest and rent?

[mozart]

Hello hello,

This is my first time posting on the forum, but I've been lurking for a long time - thanks in advance to you guys for being active on the forums, have picked up a lot of useful advice from here (and of course the main MMM blog) over the past few years.

My question: I have received a signficant lump sum (~£230k) and am wondering what to do with it.

The context is that I'm a PhD student in London, with just over a year left of my funding. Before the pandemic I was renting somewhere fairly central with friends, but I boomeranged back to my parents' place (which is ~45mins outside the city) when our lease expired in the summer - it just didn't seem sensible to sign onto a new lease when the rentals market in London was actually *rising* following the lockdown. I'd love to be able to move back in to London if possible; I don't necessarily have to, as we're all working from home, but my (social) life is there and, as I'm now in my mid-20s, I do feel like I shouldn't allow this move home to become a long-term thing. I'm also of an age now where I'd quite like to have a space to myself - if I couldn't find a studio/1 bed flat then I'd probably stay at home for a while rather than move in to a houseshare. The other thing to consider is that when my PhD comes to an end I will be looking for a job, probably as a post-doctoral researcher, and possibly outside of London.

The way I see it, my options are:

1) Set aside a year's worth of rent - on the order of £15k for a studio/1 bed in London - and put the remainder in a savings account.

Then when my PhD is up and I get a proper job I will have approx £215k available as a deposit, which plus mortgage would just about buy a reasonable 1 bed flat in London (upwards of £400k). This is the most conservative option and it really irks me to be both putting money in a landlord's pocket AND having my remaining money sit as cash.

2) Set aside a year's rent and put the remainder in the stock market.

Added to my existing portfolio, and assuming 4% withdrawal rate, this should yield approx £1000pm, which would cover the lions share of the rent of a 1 bed flat in London (£1400pm) and, if I were to move out of London subsequently, would probably then cover all of my rent. Of course the problem here is that the lump sum then becomes unavailable to use as a deposit in the short to medium term, in case I did want to buy my own place. I know we're not supposed to time the market but things aren't looking great economically at the moment, so I worry that this is financially more risky than usual at the moment. There's also the tax implications, because the investment would be greater than my ISA allowance, so are theoretically taxable - while I'm still a PhD student I think any income/capital gain would be less than my personal allowances, but as a longer-term strategy I suspect I would start having to factor in capital gains tax of 10% initially.

3) Buy a property as an investment.

This in some ways is a halfway house between the two options above - like the stocks option, my money would be invested rather than sitting as cash (at least if I find somewhere run down that I can add value to), and I would also be saving the money that I would otherwise spend on rent; but if I did want to get into investment property in a more serious way then this would perhaps provide a more natural progression than putting my money in and taking it out of stocks again. However, the major problem is that I can't get a mortgage as a PhD student so would have to pay cash, ruling me out of London. So this wouldn't help me get back in to town but I suppose I would at least have my own place and could have friends round. There's also, like stocks, a lot of Covid uncertainty around at the moment which perhaps means that my horizon at the moment - a year to the end of the PhD - is too short to be considering investments seriously at all.

Would really appreciate any thoughts you have on the above! Thanks again in advance.



-----
Details:

Income
I've got funding for my PhD which pays me a stipend of approx £27k p.a. until the end of Dec '21. Importantly, this is not taxable income, so the £27k is my take-home figure and also leaves me with all my personal allowances/savings allowances etc. unused (which may be relevant to the investment question).

Outgoings
While I'm living at home with my parents I'm not paying rent or contributing to the food bill (I'm aware I'm extremely fortunate in this...!) I have also been staying at my girlfriend's flat periodically and contribute £200 towards her bills/rent. But other than this I have essentially no fixed expenses and am able to save a lot of my income - most of which goes towards buying index funds.

In more normal times I'd expect to spend maybe £300pm on food, £150 on doing sport (club fees, kit etc.), £350 on going out (mostly theatre - big expense but also completely discretionary), £200 on misc. other expenses and £500pm to investments - pretty bloody luxurious in the context of MMM, but I'm aware of that and happy to accept a slightly longer path to FIRE whilst doing work that I enjoy.

Assets
Approx £75k invested. Vast majority (85%) in worldwide equity funds, remainder spread across other asset classes like gold, bonds etc. to try to reduce the downside/psychological risk.
 

[vand]

You're in a very strong and lucky position.

You say you have 75k invested already - cool, is this in an ISA, pension or general taxable account?

My view is that you always gotta go for the low hanging fruit first. That means taking advantage of the most obvious tax shields, which in your circumstances must surely mean continually maxing out your Lifetime ISA (the only complete end to end tax shield available in the UK). After that, contribute as much into your pension as you possible can while living off your humongous cash pile, and max out the rest of your £20k ISA allowance.

What to do with the rest of the cash is really up to you. I personally like the idea of a BTL with an interest only mortgage (pretty standard here in the UK) while building a pot to pay off the capital with a diversified portfolio within your S&S ISA.. that way you are getting leverage and income from the property market, but also investing in stock, bonds and anything else you are buying within your ISA, so you get the diversification that way. 

However as you have said that might be tricky for you until you can land a permanent job, so you might just need to rent for a year until your studies end and you enter the workforce properly.

[mozart]

Thanks for your reply Vand. Yes investments so far are protected in the stocks and shares ISA - had discounted the LISA previously as I thought it looked a bit restrictive, but may reconsider that again now. As you say, in the meantime may be best just to hold off until I'm into the job market proper.

[lhamo]

The global higher education market is in chaos right now.  Buckle down and finish your Ph.D. and line up your first job.  It might be worth it to buy a place in whatever city you land in or it might not -- here in the US property values are highly inflated at the moment due to historically low interest rates.  If you will only be in the new location 2-3 years for sure, sinking a bunch of money into an overpriced market may not be the right choice.

[former player]

You currently have almost unlimited options for what you do after your PhD: you might stay in London, you might move out of London to another part of the UK or you might move almost anywhere in the world.  Home ownership, whether your own home or a rental, and even more a mortgage, will be a drap on that freedom of choice.  Plus, house prices are currently pretty high, relatively speaking, and investing in the stock market is probably going to be a better return over time. (The UK bias towards property investing is a historical one from the days when stock market investing was a lot more difficult and expensive than it is now with Vanguard.)

I would suggest splitting your money between the stock market (because of low performance year to date you will already be doing better than someone who invested earlier this year) and a cash investment.  Don't forget that for cash investments you don't want to put more than £85k into a single institution if you want the full government guarantee for it.

[vand]

Thanks for your reply Vand. Yes investments so far are protected in the stocks and shares ISA - had discounted the LISA previously as I thought it looked a bit restrictive, but may reconsider that again now. As you say, in the meantime may be best just to hold off until I'm into the job market proper.

Yes LISA options are somewhat limited, but even the most sophisticated investor needs some boring investments too, and the LISA can meet those needs. If you take advantage of it every year you are able to until you are 50, thats basically 25k you're getting back from the taxman in total. Its not a game changer in the overall scheme of a working career, but hey 25k is 25k and that can bring your FI forward by a couple of years, so what's not to like about that..

[alsoknownasDean]

If you need to access the money in a year or so for any reason, keep it in something very low risk. If you are investing longer term (at least 5 years), then look at shares or similar.

If you put that 215K into Vanguard, it might be 275k in a year, or it might be 150k. What would be the impact if the value does drop to 150k and you decide to buy a place then?

I'd go for Option 1 at this stage.

[Playing with Fire UK]

Consider that if you get a investment property you'll no longer be a first time buyer, so can't use a LISA for a second purchase. And you can't use a LISA for homes more than £450k, which could be a challenge in London by the time you are looking to buy.

How likely is it that you'll find work in London after your Ph.D? Would you be willing to live elsewhere in the country if that was where the work was? If there is reasonable a chance that you'll end up living away from a property you've bought then you should really wait until you know where you'll be based, tough though that is when you are living with your folks.

You don't have the advantages that other BTL buyers have: you're unlikely to get a BTL mortgage to use leverage, you'll be stung on stamp duty when you buy your own place, and you won't necessarily have the option to live nearby to reduce the maintenance and management costs. Your return will be lower than other BTLers and it will be a huge proportion of all the money you have at a time when house prices could well fall.

I'd put less than 50% into a General Investment Account (buy income units, not acc. units, read up on defusing capital gains) and keep the rest in cash (limited to £85k per bank) or premium bonds. Probably premium bonds. Or more of your gold/bonds/whatever that your other 15% is invested in as long as it is lower risk and makes you feel better.

If London opens up then absolutely look for for a one bed to rent. It sounds like it'll improve your life quality and you can afford it. I'd try to stay living with parents while Covid is limiting what you could do in London, it's different during these weird times than living at home forever. If you are finding it a struggle or they are dropping hints that it's time to leave, that would change the picture.

[mozart]

Thanks all - I guess where the original question was coming from was that, psychologically, it feels a bit like sitting on that kind of sum as just cash/cash-equivalents feels wasteful. So it's good to get reassurance that actually maybe that's the best thing to do at least for the next year or so.

And thanks also for highlighting some of the downsides of BTL @Playing with Fire UK. Again helps to dissuage some of that financial FOMO. What's your reasoning for favouring Premium Bonds? I was under the impression that they're generally to be avoided?

In any case, synthesising what's been said already, seems like best option is to max out ISA allowances and then keep my powder dry with the rest of it.

[Playing with Fire UK]

Premium Bonds go in and out of favour. I like them (relatively, not absolutely) for cash at the moment because so many of the best buy savings accounts are either limited time offers or having the rates cut. Premium Bonds are a decent way of getting a not-awful interest rate on a big chunk of cash with a higher guarantee than a bank account.

Having said that, I don't love them. I'm holding less cash at the moment and struggling to look for a suitable lower volatility option.

[MrThatsDifferent]

If it were me, I’d set aside 20% of a deposit for a property (so 80k), then have some aside for emergency money (say 15k) and invest the rest. Covid is going to continue battering the country. I’d stay with the parents until the phd is finished and you know where you’re going to work. Then, I’d buy the first home. I’d do all of this because it preserves the most amount of working capital, gives the greatest security and accounts for the uncertainty of the next 18-24 months.

[vand]

I would definitely agree with the advice of not getting into BTL as your first property, as you'll lose out on all FTB privileges. House prices are overpriced in many areas especially in the South, while I think we may already have seen the bottom of the market in mortgage rates as headline rates seem to be creeping up again, so I think after the lockdown mini-boom prices will once again come under moderate pressure.


While you should theoretically have a lot of options once you finish your PhD and have a stable income, in reality your choices will probably be driven by your life circumstances, and simply doing what is most obvious given whatever job/location/social situation you find yourself in.

If you happen to end up outside of London then that could be seen as an advantage, as London housing is insanely expensive. You could buy a first home outside of London, live there for a few years and build up some equity, then convert it into a Let-To-Buy in a few years, while taking max advantage to max out your ISA/Pension contributions thanks to your pile of cash during those years you're living there as your main home.

[Rinch]

I'm a Brit currently living outside the UK so not up to date with the more exotic investment vehicles.

I own a BTL though not in London. For the first 10 years it was great. went up in value and mortgage got paid. Currently in a bit of an awkward situation involving rent arrears and various other  tenant issues. Being a landlord is pretty rubbish sometimes. Especially if you're not a total bastard.  Investing in ETFs is definitely way more hands off.

I bought the flat just before I left the UK with the idea that I didn't know where I would be but I wanted to do something with some cash I had and it seemed like a reasonable thing to do. I'm about halfway through the mortgage now. My plan is to leave it until I need the money or just have a small income from it when the capital is all paid off. Probably not a great investment in terms of performance but, relatively low risk and flats are quite tangible. I quite like the idea that if it all went tits up I could always move back into that flat and I wouldn't be homeless. Some people I know who do buy to let more seriously take out whopping interest only loans get as much leverage as possible betting on house price rises. Seems excessively risky to me but there it is.

If I was you I would stay out of property you don't want to live in if you want an easy life.  I would max out your S&S isa for this year and next. That'll take care of 40k. For the rest, you need to think about how much you need for a deposit. Anywhere outside of London 100k is probably plenty (I could well be out of touch here), Especially if you're buying in a couple. So I would put around 100k in something easy access (maybe even cash) and the other 100k in a taxable investment account of some sort (not a lisa or something you can't get access to).

sidenote: have you ever tried to explain premium bonds to a non-brit? What a ludicrous investment vehicle they are? I don't care if they are good value, it's a government backed cross between a raffle and a bank account for goodness sake. 

When you decide where you want to be in a few years you can either use your 100k cash (plus whatever you save in the meantime) for a deposit or if you really need a mega deposit you could consider raiding the taxable account. If it's gone up (lucky you!) you might have to take a hit on capital gains and if it's gone down you will have to take a hit on the losses but at least you can get at it with minimal penalties if there is no other choice.