For years, buy to let has been seen as the asset of choice for savvy investors. Millions of people have turned to property after becoming disillusioned with dismal savings rates and volatile stock markets. But, is buy to let really such a great investment?
Some people don’t even believe that property should be considered an investment in the traditional sense. John Heron, the managing director of Paragon, says: "Buy-to-let is not an investment in the normal meaning of the word. It is a commercial activity regardless of whether you have one or 100 properties.”
Our guide looks at the pros and cons of investing in property. We also compare property to other types of investment.
Why invest in property?
After the boom years of the mid 200s, property is once again proving popular with investors. George Cardale from Savills, the property consultants, told the Daily Telegraph: “We are experiencing the return of the buy-to-let investor, who now make up 16 per cent of our buyers.
"Prime property is perceived to be a safe investment.”
David Whittaker, a director at buy-to-let specialist Mortgages for Business, agrees. He told The Independent: “Buy-to-let is one of the few segments of the mortgage market that is really flourishing and investors are seeing strong returns.
“Yields on buy-to-let are much stronger than in other asset classes, which is tempting an increasing number of investors into the market."
There are lots of reasons that investors have turned to property in recent years. These include:
- A low Base rate has resulted in low savings rates which rarely keep pace with rises in the cost of living
- Volatile stock markets which have eroded the value of investments and pension funds
- The opportunity to generate both an income (from rental payments) and capital growth (from an increase in the value of the property)
- Low cost mortgages which have allowed landlords to spread their capital over more than one property
- The ‘safety’ of property as an asset class as there is always a demand for housing
- Tax benefits – there are lots of expenses that you can claim such as interest on your loan, repairs and maintenance and professional fees
- Returns on property have historically been good – according to the Department for Communities and Local Government, residential property prices have, historically, doubled every 7-10 years and has a 100 per cent record of price recovery
Another major advantage of investing in property is that you always retain ownership and control of the underlying asset. If you invest in the stock market there is always the potential that you could lose all your capital. For example, the company you have invested in may go out of business. However, this is not the case with property. Even if you fall into negative equity, as long as you continue to receive rental income the capital value should eventually recover as you always retain the asset.
The downsides of investing in buy to let property and the advantages of other investments
There are lots of reasons to invest in property. In the long term, the value of property almost always rises and, in the meantime, you can benefit from an income from letting out your property.
However, buy to let may not be for you. It can be more hassle, more expensive and more time consuming than other investments, as we see here.
Buy to let takes more time and effort than other investments
Regardless of whether yields are good and property prices are low, is buy-to-let for you? Do you have sufficient capital at your disposal to buy property? Are you happy to tie up this capital for a number of years? And, have you the time and resources to manage the property?
If the answer to any of these is no, then other investments may be more suitable for you.
Buy to let is, effectively, a business and you should treat it as such. Many people see buy to let as a ‘get rich quick’ scheme without considering the hassle of being responsible for a rental property. As the Daily Telegraph warns: ‘How can you avoid the tenant from hell who simply stops paying rent or does a midnight flit, carrying off any valuable fixtures and fittings?’
Other types of investment do not require such pro-activity. They aren’t as time consuming and are unlikely to give you as many sleepless nights.
You’re putting all your eggs in one basket
The Daily Telegraph warns that investing in property means ‘that too much of your wealth is invested in a single asset. This would break what is sometimes described as the first rule of investment; to spread risk and avoid having too many eggs in one basket.’
Using all your capital to buy a rental property means you won’t have a diversified portfolio of investments with different risk profiles.
It is an illiquid asset
Geoff Penrice, an independent financial adviser with Honister Partners, says: "There is also the liquidity risk as it can be very difficult and expensive to sell a property should you wish to release your capital.”
If you need to release the capital from your property it can take months to achieve this. In 2012, the Daily Telegraph reported that ‘the average time a home takes to sell has remained unchanged, taking just under 10 weeks.’ You can have money from the sale of shares in your bank account in a matter of days. Do you want to wait several months to realise your property investment?
Income can be variable and the asset can cost you money
Other than property, there are few investments that might actually cost you money. Sure, you might pay management fees for invested funds or fees to a stock broker for managing your portfolio, but you don’t have to pay for the upkeep or maintenance of the asset.
For example, if you have periods without tenants you lose income. This may mean that you have to pay your buy to let mortgage from your own resources. LSL research shows 10.7 per cent of all rent was either late or unpaid at the end of 2011.
In addition, ongoing costs reduce the income yield you receive. Such costs may include letting agent fees, and maintenance and repair costs.
Do you have additional capital available to maintain your asset? If not, other types of investment may be more suitable.
Transaction fees are high
When you invest in a savings account, it’s rare that it will cost you anything to set up. And, even if you invest in shares you’ll find that transaction costs are quite low as a percentage of the amount you invest. Pension contribution initial charges generally won’t exceed 3 per cent of your investment.
When you invest in property you may have to spend money on:
- Stamp duty
- Solicitor’s fees
- Estate agent’s fees
- Mortgage broker and arrangement fees
- Repairs, maintenance, renovation and redecoration
- Insurance
It can take a long time for the value of your asset to recover
Stock markets can often be volatile. However, they can often recover much quicker than other forms of investment.
House prices have been stagnant in the UK for the best part of five years. While many landlords expect the value of their properties to increase in the medium to long term, you may have to wait a considerable time for this.
For example, what if you were set to retire in 2008? Four years later you may still have your property investment as you wait for property prices to recover. It’s unlikely you would have been forced to wait as long for another type of asset to recover its value.
