How the model works
Comparing property and stocks is like comparing apples and oranges: here's how we level the field.
Leveling the field: what "fair" means
To make the comparison fair, the model assumes you have a fixed amount of starting cash. In the Property scenario, this cash pays for the deposit, stamp duty (including the 3% surcharge), and legal/survey fees (estimated at £2.5k). If there is any cash left over after these costs, it is invested in stocks alongside the property.
In the Equities scenario, the exact same starting cash is invested in index funds from day one. This captures the "opportunity cost" of the cash tied up in a property deposit.
The power (and risk) of leverage
Property's main advantage is leverage. If you put down a 25% deposit, you control an asset 4x your initial investment. A 3% rise in property value is a 12% return on your actual cash (before costs). However, leverage works both ways: it also magnifies your losses and requires you to service the full mortgage interest even if the property is vacant.
Tax and Running Costs
- Rental Income: We calculate net rental profit after maintenance, insurance, and interest-only mortgage payments. Since 2020 (Section 24), you cannot deduct all mortgage interest from your rental income before tax; the model applies the 20% tax credit correctly.
- Reinvestment: The model assumes any net rental profit (after tax) is reinvested into the stock market every month. This ensures property "income" is compounded fairly against stock market returns.
- Capital Gains Tax (CGT): The property line on the chart shows the value after estimated UK CGT is paid, assuming you sell in that year. This is vital because property CGT is higher (18/24%) and harder to avoid than stock market CGT (which can be shielded in ISAs/SIPPs).