Property has always been a major investment sector, particularly for the large-scale institutional investors such as the pension funds and insurance companies.
But for the small investor, (apart from owning your own home) property has for long been overshadowed by the various investment opportunities provided by banks, building societies, pensions, investment, unit trusts, and stocks and shares.
People have always appreciated the benefits of owning property (bricks and mortar) over the long-term, particularly with regard to capital appreciation. But the boom years of the recent past have shown the real potential of property as an investment, though clearly more recently we are beginning to see there are risks as well.
Many small and medium size private investors and landlords will stick with property investments through "thick & thin", through good times and bad, and will reap the long-term benefits.
Investment markets of all kinds are cyclical in nature (they rise and fall over time) but investment in property (particularly residential) was hampered for many years by punitive socialist legislation (the Rent Acts) which was clearly biased against the investor/landlord.
More recently the UK investment scene has changed quite a bit. So much so that property has once again come into favour as an investment medium, particularly for the small investor, but this time on a scale as never seen before - you could call this the buy-to-let revolution.
Despite a recession, and a fall in property values, careful investors will come through this with increasing wealth and incomes - indeed, there will be some outstanding investment opportunities in property in the coming months and years.
Low inflation and interest rates (relative to previous years) - mean that it's hard to find decent returns on cash investments such as bank and building society accounts.
Volatility in the stock markets - has led investors to think twice about putting more money there - over recent years market returns have been good, but at times the stock market looks decidedly risky.
Problems with pensions - with the demise of stalwarts like Equitable Life and diminishing returns people are thinking that pensions are not the only place for their money, even with the tax incentives.
House price inflation - we have seen some quite dramatic rises in property prices over recent times. However, prices can fall back as we are witnessing in 2008.
Increasing job mobility - more single households and rising property prices have been a boost to the demand for rented accommodation.
A re balancing of the housing laws (1988 and 1966 Housing Acts) - now make it much less risky to let residential property. So much so that the average man in the street is happy to become a landlord.
Increasing affluence - in the UK (recessions excepted) means that there are now many more people with second homes and funds available for investment.
The Buy-to-Let mortgage - has brought down the cost of borrowing funds for residential investments - so much so that the success of the buy-to-let mortgage has led recently to the comment that we are becoming a nation of landlords!
Many of these factors are now being affected by the recession we are experiencing in 2008 and 2009.
Different types of investment can be compared both in terms of their overall risk, and their potential rewards (yield).
Investments give you two kinds of reward: interest (income) and capital growth (increase in value).
The safest forms of investment may only give one of these, for example, a National Savings Bank investment will give you a guaranteed interest of about (6% 2008) with absolutely minimal risk - you are guaranteed to get your capital back, but the capital will not appreciate in value.
At the other extreme, a high performance share in a smaller company may give a low income (dividend payouts minimal or zero) but a high capital appreciation (growth in share price)
This is obviously a more risky investment because you could lose some or all of your capital if the company goes bust, but you could also make a lot if the share prices multiplies say 10 fold in 12 months.
These two examples are at two extremes of the risk/reward spectrum:
Low risk ________________________________High risk
With any investment you should take inflation and taxation into account. The National Savings investment may return little better than the current rate of inflation, giving a real rate of return over time approaching zero!
On the other hand, the high risk share investment, if it works out, may return many times the rate of inflation.
With these two types of investment we also have two extremes with regard to taxation: the former is tax free, whereas the latter will be subject to both Income Tax (on the dividends paid out annually) and to Capital Gains Tax (on the increase in capital value over time).
Lets suppose we buy a mixed property investment for £100,000 - a retail shop with a flat above in a good area - one with a highly dense population and lots of surrounding amenities and transport links.
The property is a bit run-down so you spend £10,000 on refurbishment and manage to let fairly quickly to two good tenants.
Where on the scale of investment risk does our property investment lie, and what are the inflation and taxation factors we need to consider? In what other ways does our property investment differ from the others?
Well, as an individual investment it's difficult to quantify risk as so many factors enter the equation, but on average a property of this type should be quite a bit more risky than the National Savings investment but much less risky than the high flying high risk company shares.
Property inflation has been high recently compared to the general levels of inflation (RPI), therefore the value of the property, on past experience, even allowing for market falls through a recession, should be expected to rise well above the inflation rate long-term. Commercial properties have tended to rise less spectacularly than residential so expect only a steady increase here.
Taxation on property investments is similar to that imposed on businesses and certain expenses can be claimed - see our Taxation section.
Income is generally high in relation to the capital values - for example the above property (in a reasonable area with good tenants) may easily return a rental of £8,000 for the shop and £5,500 for the flat - a return of 12.27%
Given the property inflation we have been experiencing over recent years (though values are falling now 2008) the capital value of the investment, given it now has good tenants and is in good repair, could well increase to £145,000 after the first year.
This would give a total return of 13,500+35,000, or 44.1% total return. Sounds too good to be true?
Well, if all these factors fall into place, it's perfectly possible.
Your property investment is going to need active management. This can be done either by yourself or by letting/managing agents.
It's very unlikely that you could lose all of your investment, as you can with shares. Unless you forget to insure it and it burns down to the ground, your money is relatively safe.
But remember, unlike shares and savings, there is no quick way to get your money out. Investors in properties like this don't come along every day, so you may have to wait some time if you need to sell and get your money back.
You can of course borrow against the equity in your property if you need to.
Building up a portfolio of investments and diversifying your risk is a good way to proceed. Every saver / investor should start by owning their own home. Everyone should have a pension and some cash savings for a rainy day.
Then, and only then, should you consider venturing out into property investments and shares.
By having a balanced portfolio like this, and as you grow having a balanced portfolio of properties, you can reduce your risk. How quickly you grow depends a lot on luck, market timing and your attitude to risk.
If you are prepared to borrow big and expand quickly, then obviously the risks are high. In a rising property market some have done extremely well, getting in early and reaping the rewards.
But don't be fooled by those who claim they will help you become an overnight millionaire - if it were so easy they would be doing it themselves.
But by growing slowly, by taking progressive, deliberate steps along the way, you can grow your wealth in a safe, sure way.
You should view your investment strategy as a life time's occupation, based on savings and hard work - not a 12 month rush to become an overnight millionaire, which will be the road to ruin for many.
Warning: Investments in property can go down as well as up in value and property can sometimes take a long time to dispose of. Never invest money in property which you may need in the short-term - invest with a long-term perspective and get trustworthy professional advice.
