Are you looking for an investment opportunity? Have you heard or thought about property?
It’s a booming area and one worth discussing. Please note though, this is an opinion and general information piece only – it is not qualified investment advice.
The risk – security conundrum
Unless you want to put your money into something like gilts, most forms of investment entail a degree of risk, even if that seems to be a contradiction in terms. The challenge for us all is trying to understand and quantify the risks then measure that against the potential return.
To put it another way, nobody wants a high-risk investment that delivers the probability of a low yield in return. How does property fare when evaluated on these criteria?
Property over time
Over the past 50-100 years, some things have proven to be highly unpredictable including stocks, currencies, precious metals, commodities and so on. If you doubt the truth of that, simply look at how some pension fund managers have prematurely aged since the various financial crises that started in 2008!
Yet over a very long time, property in the UK has been shown to be a typically sound investment. True, there have been odd glitches and traumas in the past but on the whole, property seems to recover lost ground relatively quickly.
Leaving to one side large corporate deals, if you’re a private individual and are thinking about investing in property, what options are open to you?
You could, of course, simply invest your finances in a property management group. They will then buy and sell properties, with you as a sort of shareholder.
Alternatively, you could think about buying a property and then letting it out for income. This has big attractions because it provides you with an income on a regular basis while your capital investment is hopefully protected and appreciating as property prices rise.
It’s a fact though that if it was quite so easy then almost everybody would be doing so. In practice, a number of points here are critically important:
- finding properties that are ‘cheap’ in terms of market levels for the area. They ideally should offer scope for improvement for relatively small sums. Be very cautious about properties requiring structural work unless you want to spend a fortune on engineers. Equally, impeccable properties offering little scope for improvement might not represent the best profit opportunities either;
- look at multiple sources for property. Estate agencies are fine but think about private sales and public auctions too (though don’t assume property is always cheaper simply because it’s being auctioned off);
- be sure that you understand the desirability of the area in terms of the potential for appreciation after work. Ideally, up-and-coming areas are the main target. In depressed areas, property price growth may be small or even sometimes negative. By contrast, buying into well-established and expensive areas may limit your potential for profit growth;
- recognise your responsibilities as a would-be landlord. If you don’t know the answer to questions such as “what is landlord insurance” then find out! Landlord property insurance is different to owner-occupier cover and you need to make sure your interests and the property are protected by appropriate cover;
- develop a business plan. Although the tenant market is very active right now and demand exceeds supply, you need to be sure you know who you’re targeting, what they want and have realistic rental income projection plans for your property.
Are returns guaranteed?
Many new entrants to the buy to let property markets ask this question but there’s no real answer. Once again, yes, property prices and average rents can go down as well as up.
Investment property has often proven to be a good bet over many years. At the moment, for example, the rental market is forecast to outperform house price growth, with no signs of that diminishing thanks to population growth and a moderately healthy economy.
However, it is always sensible to keep an eye on the broad economic indicators to decide when and if you’d like to either increase or offload your property portfolio.
Further reading: Cover4LetProperty Guide to Finding Your Next Investment Property.