Property, along with bonds, stocks and shares, is one of the UK’s most popular areas of investment.
The stock market is, by its very nature, highly volatile and unpredictable; fortunes can be made, and often are. Unfortunately, the reverse is also true. Some investors are happy to take this risk and find it exhilarating, while others look for something rather more dependable.
Bricks and mortar: solid, tangible assets
When property can yield regular rental income and subsequently be sold on at a profit, it is easy to understand their appeal.
Some investors like to put their money into a managed property fund, others opt to buy and run a property themselves.
Whichever option they decide on, investors should bear in mind that the property market can be volatile too – we’ve all heard horror stories of the property crash in 2008’s recession.
Prices and rents can go down as well as up; property investment is a long-term commitment.
However, because of the UK’s population density the market tends to stabilise quickly after an economic crisis and recovery soon follows.
In fact, as a rule of thumb, UK property prices roughly double every decade. So, if an investor has the time and the patience, the rewards can be appreciable.
The risks in UK property investments
For most individual investors in the UK, property investment means Buy-to-Let (BTL).
However, such investments have become increasingly complex and expensive.
Stamp Duty on residential property has been increased in every price bracket, while rental income tax relief will be reduced from April 2017 and capped at 20% by 2020.
Most investments offer some form of customer rights and protection; BTL does not. Buildings insurance is compulsory when the property has been bought with a mortgage, and landlord insurance is definitely recommended.
Being a landlord isn’t like having friends round to stay; any BTL property must conform to a whole raft of government and local authority specifications.
Implementing these may involve costly conversion work.
Landlords also have obligations to their tenants, which may prove to be time consuming, inconvenient and sometimes unforeseeably expensive.
Finding and vetting those tenants also takes up time, during which no income is being earned, and this process must be repeated at the end of each tenancy.
Rent collection and defaulters also take up time and, consequently, money – especially if the authorities and courts get involved.
Of course, investors can choose to farm these responsibilities out to a management company, but this will come at a price.
Rental income can be affected by a range of external influences, such as the national economy, local development or local business relocations.
There is no such thing as a guaranteed, fixed yield for a BTL landlord.
If a landlord needs to cash in the investment, this will take time to achieve and the result may be disappointing depending on market circumstances. If there’s a profit, Capital Gains Tax will apply.
Dependable property investment alternatives
There’s no such thing as a water tight guarantee of success in any investment; but you can improve your odds enormously in the property sector by following a few simple rules.
Bearing in mind the twin objectives are regular rental income and capital growth, your first consideration should be:
Rental demand is created by an undersupply of accommodation in areas where there is a constant throughput of temporary residents.
A lot of BTL property is aimed at the student market in the UK’s university towns.
If you can offer high-quality, close-to-campus accommodation to the student body of ambitious, popular universities with a severe shortage of student rooms, you have a head start.
If the property is for leisure rentals, make sure you buy in an area which has been proven to be popular with overnight tourists both from home and abroad.
The nearer to local attractions, the better – especially if you can offer private parking too.
Professional property management
A 24/7 onsite management team can relieve all the headaches of traditional BTL ownership.
The team should be responsible for all vetting and letting, routine and major maintenance, security, rent collection, insurance and utility bills.
Management should ideally be included in the purchase price, with no extra costs guaranteed for 10 years. Beyond the sheer convenience of the service, it also helps protect the value of the property.
Fixed NET yields, fixed income term
Impossible with BTL, but some developers offer contracted yields for fixed periods of time.
Look for anything over 7%, ideally for a 10-year period.
Before you make any kind of investment, always make sure you can get out easily. Anybody’s circumstances can change overnight, and it’s no help then to be trapped in a contract.
Look for a fixed income period that is fully transferable at resale; this will be hugely attractive to potential buyers and will help you access your cash as quickly as possible.
One of the drawbacks of BTL can be tracking down freeholders to extend a lease (at a price) or grant permission for conversions.
If you can’t buy freehold, look for a lease of over 120 years.
Unless your BTL is a new build, it’s unlikely you’ll get any kind of guarantee. A specialist developer, however, should be able to provide a 10-year independent warranty.
In these days of post-referendum uncertainty, the residential property market (which includes BTL) is as vulnerable to economic turmoil as any other.
Consider other sectors that will not only ride out the exchange rate storm, but will actually benefit from it – such as Purpose Built Student Accommodation or Serviced Apartments.
Both of these are classified as commercial property, and are therefore exempt from Stamp Duty below £150,000 and not liable to Capital Gains Tax on resale.
The number of students in the UK is at an all-time high and the trend has been upwards for decades. Should we slip into recession, there is concrete evidence that student numbers will rise even higher.
The weak pound also means that Britain is the best value it’s been for overseas visitors since the mid 80s and the hospitality industry is booming.
Properties that people want to stay in
Expectations of rental property today are high; students and travellers alike expect accommodation that is furnished and equipped to the very highest standards.
They demand high end onsite facilities, such as gyms and cinemas, which few BTL landlords are able to provide.
Consult a specialist
Before you commit to a BTL property, think about some of the drawbacks we’ve referred to. Property investment is a major step, but it doesn’t have to be complicated either at purchase or at resale – or indeed at any point in between.