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Article:
Property as an Investment
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 investments opportunities provided by banks, building
societies, pensions, investment and unit trusts, and stocks and
shares.
People have always appreciated
the benefits of owning property (bricks and mortar) over
the long-term, particularly regarding capital
appreciation. and some small private landlords have stuck
with property investments through "thick &
thin", through good times and bad.
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 through legislation 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.
There are several reasons
for this:
- Low inflation and
interest rates 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 here - over recent years market returns
have been good, but currently the stock market looks decidedly
risky.
- Problems with pensions. With the demise of stalwarts like
Equitable Life and diminishing returns on annuities
(UK rules mean that most of your pension return comes
from the purchase of an annuity) people are thinking
that pensions are not the only place for your money,
even with their tax incentives.
- Continuing house price
inflation - we have seen some quite dramatic rises in
property prices over recent times.
- Increasing job mobility, more
single households and rising property prices have
been a boost to the demand for rented accommodation.
- A rebalancing 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
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!
Investment Returns - back to
basics
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 (3% 2002) 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) 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 wrong, but you could also make a lot
if the share prices multiplies 10 fold in 12 months.
These two examples are at two
extremes of the risk spectrum:
Low risk
________________________________High risk
Inflation & Taxation
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).
Property Investments
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 factor 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,
should be expected to rise well above the inflation rate.
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 Taxation
What are the main differences if you
go for property investments:
- Income is generally high in
relation to the capital values - for example the above
property (in a good 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 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% 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 the money back.
- You can of course borrow against
the property if you need to.
A Portfolio of Investments
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.
©
LandlordZONE 2006 |
