Cash conundrum: Property or shares?

pound coins

I'm Fergus Muirhead and I'm here to answer any questions you may have about any money or consumer issues.

Please drop me a line at fergus@bbc.co.uk with your questions. You can also read more on money and consumer issues on my own blog.

Q. I would like some guidelines to make a pretty important decision. I am 53 years old and retiring at 60. I am divorced with a new girlfriend living in her apartment. I have around £120,000 pounds in cash. What should I do? I have seen a property which I like and if I buy it, I can rent it out. But I am also thinking about shares and perhaps investing in pretty solid blue chip companies for the next six or seven years. But I need quick access to my money, should it not work out with my girlfriend and I have to move into my own place again. I don't like the idea of ISAs, especially with inflation running at close to 3% and lack of access. I don't want a mortgage when I retire. So I am trying to get a feel of how the property market will perform over the next six or seven years, and the same for shares. I know you don't have a crystal ball, but I want to try and narrow down my thought process. At the moment, buying a small flat and renting is jumping out at me, even with all the possible problems, but I also like the idea of shares because of the freedom and I would no longer be in debt. I'm just a bit worried I am not going to make the same sort of return from shares as property. Can you help? John Robertson (name changed)

A. This is a great question and it's one that doesn't have any right or wrong answers, but is worthy of discussion anyway. So I'm going to devote the whole of the page this week to some rambling thoughts that might help you. They are in no particular order of importance.

You are in a new relationship and are obviously concerned that if things don't work out, you will have to move out of your girlfriend's apartment and either buy or rent your own. But you might not know the answer to that one for a long time.

So you need to know what is the best thing to do with the £120,000 that is currently in the bank. Presumably you don't want to leave it in the bank at the moment because interest rates are so low and the return you get is likely to be less than the current rate of inflation, before tax. Also, I can only assume from your statement about retiring at 60 that you are working at the moment, and therefore paying tax. If that is the case then any interest you earn on money in the bank will be taxed at your highest rate of tax.

So, property versus shares?

Presumably if you don't want a mortgage when you retire you'll need to take a fairly short term loan at the moment, since you plan to retire in six or seven years. Most lenders will in fact only look at 10-year minimum term mortgages so you may have to take one out over that time period and look at a way to repay early.

Perhaps you are planning to buy using cash only, without the use of a mortgage. But if you're planning to rent in at least the short term then you might as well borrow and use the rental income to pay any loan - especially when rates are as low as they are at the moment.

Remember as well that when you look for a house to rent you might look through different eyes than if you are buying to live in it. So the house that you buy now and rent out might not be suitable for the longer term if you decide, or have to, live in your own place again.

And a quick comment on ISAs. There is no time limit when investing in an ISA. You can invest today and withdraw your money tomorrow. For some reason lots of people seem to think that money in ISAs is "tied up". But it's not, it's available anytime.

Now to your six million dollar question. What will happen to property prices over the next six or seven years, and how does it compare to what is likely to happen to shares?

Well, the honest answer is that I don't have a clue. I could compile lists of figures of relative performance of property and equities over different time periods that could show that either one was far superior to the other. I could spend all day with tales of investors who have made and lost millions by buying the wrong property or the wrong shares at the right/wrong time or by holding on to them for too much/too little time.

For me, the advantage of buying property to rent (as opposed to living in) is that you can "gear" your money. So for every £50,000 you have, you can go and borrow roughly three times that (as long as income, credit history and potential rental income all add up) so that someone else is effectively helping you increase your capital from £50,000 to £200,000.

You will very rarely (I hesitate to use the word "never" because someone somewhere will have made a huge gain from one individual share at some point in history - maybe!) make the same from shares. So if you want to "gear up" to this extent then buy some property, but remember that many commentators think that the market may still have some way to fall. And remember too that interest rates may rise in the short to medium term.

If, on the other hand, you are content to take your £120,000 and invest it in a mixed bag of assets that may rise or may fall over the short term but should (and I use the word "should" because there is no guarantee) rise over the longer term, then you might want to look at the equity market instead, or even hedge your bets with some cash, some fixed interest investments and some shares.

You might even want to do a bit of both and use some of your capital as a deposit on a house to rent, with the rest to be invested in the stock market. You might decide to stick it all under the pillow or on the 2.30 at Newmarket.

There is no correct answer, as I said at the start. Just make sure that you answer all of the questions I have asked here and take some sensible time to think through what it is that you want to achieve long term before you make any decisions. And keep in touch and let us know what you decide to do!

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