We are constantly asked particularly by clients and prospects, whether they should invest in property, such as in residential buy to let investments.
It’s certainly true that real estate in the UK has appreciate significantly over the long term. The fact also that property prices are not updated on a daily basis like the stock market makes us unaware of its actual volatility, and less worried about investing in it.
Over the very long term property can certainly be a good investment as like company shares it provides cash flow and hedges against inflation. We don’t think however property is the investment you should start with when saving for your financial future. Here are ten reasons to be cautious-
1) Property is probably already a big part of your net worth as most likely you own your own house. You already, therefore, have significant exposure to its price movements
2) In order to buy an investment property you will need to borrow money. This automatically increases your risk as it amplifies your returns but also you can end up owing more to the bank than the value of the property.
3) Property Investment is a hands-on proper business which needs time. It is not a passive investment. Professional landlords who manage multiple properties very much get their hands dirty every day with DIY, evictions, difficult tenants, safety and regulations, and 100 other things. Your global index portfolio will not wake you up at night telling you the boiler has broken.
4) Once again you are taking on more exposure to the country where you live, work, and earn your money. If something happens to the UK economy your investment property (as well as everything else of yours) will take a hit on price and may well lose its tenants. You can’t diversify easily.
5) You can’t buy small. Fractional shares of property as a vehicle to save your excess earnings every month. You also can’t buy bits of property at different prices and have them compound over time.
6) Conversely, You can’t sell bits of a property if you need to draw down the investment over time. Property is also one of the most illiquid asset classes as well and it could take you months to sell your investment.
7) You can’t put residential property into an ISA or a pension. This is a big disadvantage. The government therefore won’t subsidize your investment for up to 45 pounds for every 55 pounds you put in (pension) or tax you zero when you take your money out (ISA). This means property has to outperform stocks and shares ISAs by as much as 28% (for capital gains) just to get the same after tax returns.
8) Property in the UK is actually taxed higher than equities and bonds. Capital Gains tax is 8% higher, there is a 3% Stamp duty surcharge on purchases and normal stamp duty is anything up to 12%. Typically you would pay 8% stamp duty for a standard Buy to let plus of course solicitor, land registry costs versus zero upfront tax or investment costs for a fund purchase.
9) Ongoing costs are much higher with property. Yields of 4 to 5% gross look attractive but people fail to factor in the costs (voids, maintenance, property management, accountancy costs, insurances) so net yields before tax can actually be more like 2.5%
10) It’s very difficult for you to have an edge with property. You should accept the fact that all the professional landlords know the business, and their area inside out and they know it much better than you. They know what the right prices to buy are, what the right areas are, what the right rents are, who the right tenants are, how much to spend on maintenance and where to get it done etc, etc. There is also no regulation or Financial Services Compensation Scheme to fall back on when things don’t work out.
The beauty of global equity index investing is you don’t need to have an edge to be financially successful over the long term – just by buying the market you are automatically outperforming the majority of active fund managers and stock pickers after fees.
For more help with creating a bespoke financial plan and an investment strategy to fund it, please contact us for an initial meeting without obligation at our expense.
This guide is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.
Not all mortgage contracts are regulated by the Financial Conduct Authority. Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.
The value of investments may go down as well as up and you may get back less than you invest.
Past performance is not a reliable indicator of future performance.
The levels and bases of taxation, and reliefs from taxation, can change at any time.