PROPERTY can be an excellent long-term investment and very many people have bene ted from significant increases in values over the past 20 years or so.
According to the Office of National Statistics (www.statistics.gov.uk), the average house price at the end of 1993 was £62,000. By 2013 this had risen to £251,000.
Property is not, however, a risk-free investment and as we all know there have been times when prices have fallen. As with many investments, values have recovered over time, but property prices do not only move in one direction – they can fall as well as rise! There are a number of ways to benefit from investment in property and I have set out a few of the options below.
Physical property purchase is probably the most commonly known form of property investment. Many people consider their home to be an investment and may have made a significant return on the capital invested.
Furthermore, when selling, the profit is tax-free provided one has used the property as the main residence. This is very attractive, but the profit can only be realised by selling and moving to a smaller home or cheaper area, neither of which may be an option.
So, although money can be made, the profits may not be easily or readily realisable. Additionally, a home can’t usually provide an income unless all or part of it is let.
An alternative way to invest in real or physical property is to buy a second property and let it out as a buy-to-let property. This is an option many people have taken up and which, once again, can be attractive.
However, it usually involves a very significant cash investment. Some investors have re-mortgaged their own home, thereby releasing capital to inject into a cash deposit for a second property and also raised a mortgage against the new rental property.
This can work well but it is also a risky strategy because, if the rental property is not let for a period of time, or the tenant fails to pay the rent, one still needs to pay the mortgage payments or one, or possibly both, properties could be repossessed by the lenders. It is also worth noting that the mortgage interest payments will reduce the return on one’s investment.
Other considerations, when investing in real property to let: the costs of purchase and sale are so high it can make it inappropriate for shorter terms, so it really needs to be considered as a longer-term investment. Also, property needs managing, which can be either expensive or time-consuming.
However, there are other, non-physical options, which offer the bene ts of property price growth.
Property funds
Funds in the property sector are defined as being those that predominantly invest in property. In order to invest “predominantly” in property, funds should either invest at least 60% of their assets directly in property or invest at least 80% of their assets in property securities (shares).
They also state that when their direct property holdings fall below the 60% threshold for a period of more than six months, the fund must invest sufficient of the balance of their assets in property securities to ensure that at least 80% of the fund is invested in property.
An investment in real property is quite different to property shares, so this is a very diverse sector and funds cannot often be meaningfully compared on a like-for-like basis. One thing that also needs to be noted is that many of the real property funds tend to invest in commercial property, which can be quite different to residential.
Investment in property funds can often be a much more attractive option than buying property outright for several reasons, one of which is that the investment amount can be considerably lower, which allows people with smaller funds to invest and also allows for a more diverse portfolio to be held. Additionally, the property investment itself will be more diverse.
If you buy a single property it will be in one building in one area so all your eggs are in the one basket. Investing in a fund will mean holding a small amount of a range of properties so, if one property is vacant it will have less impact. The fund can even out any irregularities in growth in different areas by holding property nationally, or even internationally.
An investment in a property fund is also more readily realisable: you do not have to wait to find a buyer and pay fees to release your money (although some funds do impose a waiting period in times of high disposals to allow the manger time to sell the property).
If you buy a physical property as an investment there will usually be capital gains tax on the gain on the sale and income tax on the rental income. Buying a fund, particularly if held within an ISA, can mean these taxes can be avoided.
Property company shares
Finally, investors may also benefit from increasing property prices by investing in shares of property companies, such as house builders. In times when property is in high demand, with prices soaring, the property companies tend to do well.
In summary: if you are ready to get involved in property investment and wish to build this into your overall portfolio, my advice would be:
- To not rush in, take your time and think through all the options carefully to see which one is best for you.
- It’s always going to be scary, but at some point you have to take the plunge and learn by getting involved.
- You won’t get everything 100% right first time, but mistakes get sorted over the long-term, and you’ll often be further ahead than if you’d never invested at all.
Warnings:
- Your home may be repossessed if you do not keep up repayments on your mortgage.
- The FCA does not regulate some buy-to-let mortgages.
- Past performance is no guarantee of future returns.
