In this article, we examine popular investment options and how they stack up with regard to the time and effort required, yield, risk and resale.
Investment – a long-term exercise?
You certainly shouldn’t expect to make a fortune overnight, so best to avoid speculation, which is a very reckless game.
Some would suggest that you should expect to leave your capital untouched for five years, but we wouldn’t agree; indeed, access to your money is an important consideration.
It’s not just capital you’re investing
You also need to factor in the amount of time and effort you as an investor are going to have to put in.
If you’re thinking of self-investing, you need to be honest with yourself and objectively assess how confident you are in your knowledge of financial matters – and, if necessary, be prepared to put in the hours of study and research required to bring yourself up to speed.
Of course, there are whole battalions of financial advisors out there ready to guide you through the investment minefield; just remember that their fees and commissions can and do mount up.
If you’re happy to pay for advice, make sure you know up front exactly how much it’s going to cost you and make it part of your calculations.
How different assets compare
One of the nicest dilemmas in the world is wondering where best to put a hard-earned bit of spare cash. We thought we’d take a look at some of the more likely choices.
Before you make any decisions, you need to be clear in your mind of the 7 key elements of an investment:
- The capital required. This can obviously vary from as little as £1 to as much as you like; just remember, allow yourself a safety margin and don’t leave yourself exposed
- Level of risk you deem acceptable
- The time your investment will demand of you
- Return from income
- Return from capital growth
- Ease (or otherwise) of purchase
- Ease (or otherwise) of exit
So, let’s take a look at your investment options
“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.”
– Robert G. Allen, author and investment guru
Interest rates here on the High Street are frankly wretched; shop around and you might just about find 1-2% – pretty much inflation level.
You also need to check the terms and conditions carefully; it may just be an introductory offer, with a subsequent rate reduction.
Some of these accounts have withdrawal conditions that may not suit you, so check the small print; you may well have to leave your money in for longer than you’d like to get the best possible rate.
Or maybe you’d consider bonds. These are effectively loans made by you to a business or a government which can be traded. Traditionally seen as a low risk option, many pundits are now advising caution.
“Bonds, for generations a staple holding in a mixed portfolio, in many cases now guarantee owners a modest loss. They also pose the risk of a potentially large capital loss.”
– Laura Suter, Daily Telegraph (24th September 2016)
It would probably be sensible to get a professional’s long-term view as to the prospects of this particular asset before committing your capital.
When cash ISAs were first introduced in 1999, you could get an interest rate of 6.5%, which rose to 7.25% in 2000 – tax free.
A combination of factors, including the recession of 2008, the cut and freeze of interest rates, the banks themselves and a succession of Chancellors have all contributed to the ISA’s current poor value.
As we speak, the best fixed rate on offer is 1.65% for five years.
ISAs also require annual maintenance as the new tax year comes round and you have to decide whether to top up and if so, whether to transfer and where to – which can prove quite a lot of work for little reward.
You’re also strictly limited to how much you can invest each year – just £15,240.
Stocks & shares
“If you aren’t thinking about owning a stock for ten years, don’t even think about owning it for ten minutes.”
– Warren Buffett, investor, business magnate and philanthropist
Of course, stocks and shares can make you a fortune; they can also lose you one.
Global markets are highly volatile, as everybody knows; but, by the same token, they tend to be cyclical.
History has shown that what goes up must come down, but what comes down will, over time, go up again.
It’s largely a matter of your time frame and your cardiologist’s advice – if you can watch the value of your portfolio fall through the floor and remain cool, calm, collected and confident that it will, one day, be back to where it was and then even better, then maybe the stock market is for you.
There are certainly plenty of people out there who get a real buzz out of the day to day ups and downs of the markets, so the time they have to spend monitoring their investments is a genuine pleasure and all part of the thrill.
Access to your capital isn’t an issue – in theory, you can sell a stock any time you choose, and within minutes. But doing it at just the right time and making a profit – that’s a different matter entirely. A lot of people don’t realise that it can be easier and more profitable to sell a property than a share.
But if you feel you’re not expert enough to run a portfolio yourself, you might consider an investment fund.
Professionally managed, such funds usually consist of a spectrum of assets, such as bonds, commodities, property and stocks.
But do check the scale of charges and commission carefully before you commit; that fund manager’s Maserati wasn’t won in a competition on the back of a cornflakes packet.
A share in a good investment fund should provide you with a decent degree of diversification, which is eminently tradeable; but of course, by committing to third-party management you are sacrificing a great deal of control over your investment.
Current performance is underwhelming, with low returns of 2-4%, typically 3.5%.
Another popular option is buy-to-let property.
Should you invest in property? In many respects, it’s a very simple investment concept; buy a property, do it up, rent it out – job done. Everybody needs a roof over their heads and we all know how hard it is nowadays to get a foot on the property ladder.
“It’s the way to make money … or so some people claim. On the surface, it seems like a sure-fire bet; in reality, it’s usually more headache than it’s worth. The challenges start early, and they almost always involve time and money.”
There are challenges all right – from the day you start looking for a property to the day you finally sell.
Unless you happen to know precisely which property you want to buy, you’re going to have to do a lot of research. If you’re very lucky, you might find a house near where you live, in which case you’ll already know about demand, average rental yields and the all-round ‘up and comingness’ of the area.
Otherwise, you’ll need to spend a few evenings on the internet and then a few hours in your car as you assess candidate properties – the time and mileage soon adds up.
As a landlord, you will have 24/7 on-call responsibilities. Unless your buy-to-let is just around the corner, this could prove to be costly, inconvenient and very anti-social. You can, of course, appoint a letting and management agent, in which case it will only prove costly.
But assuming you find somewhere suitable, you then have to buy the property.
Buy-to-let is one of the few investment options where you can borrow money to purchase your asset. By using your own money to put down a deposit and taking out a buy-to-let mortgage, the resulting leverage can see your profits rise handsomely when the property market is buoyant – but the reverse can also happen.
As an average, residential property prices more or less keep track with inflation. Recent history, though, has shown sobering evidence of spectacular booms and catastrophic busts. But all investment carries a degree of risk, and buy-to-let is certainly no exception.
To get a buy-to-let mortgage you’ll already need to be a home-owner. You’ll need a good credit rating and a reliable annual income. You’ll also need to be of a certain age – there are upper age limits for mortgage term, usually around 70 or 75. So if you’re after a 25-year loan, best get it before you turn 50.
And you’re probably going to need that financial help; because of the UK’s housing crisis (a shortfall of 1.8 million by 2025, according to RICS), central and local government are making ownership of a second residential property ever more expensive and complicated via hikes in Stamp Duty Land Tax and tightened planning legislation.
And then you have to find tenants, vet them, replace them as necessary, chase rents, leak money during void periods, organise repairs and maintenance, be permanently available on the end of a phone…
The truth is that buy-to-let represents a pretty poor reward for a lot of hard work and stress. The average UK gross rental yield is around 5% before outgoings – and then at final resale, who knows how the market will have performed and what kind of capital growth you’ll achieve? Plus there will always be the selling costs.
The undramatic Emerging Property alternative
There is, however, an investment option which requires of its owner no previous knowledge or expertise, no time commitment or administration and which will ride out most economic and market storms.
Our purpose-built student property investments and serviced apartment properties provide our buyers with a fixed, pre-contracted 8-10% NET annual income every year for 10 years.
They require no effort whatsoever on your part, as they are managed onsite 24/7 by professional teams, which take care of all letting, vetting and rent collection along with all day to day property administration, maintenance and repair. There will be no further costs to pay during the 10-year fixed income period – no ground rent, no service charges, nothing.
Each property comes with a very long 125 or 250-year leasehold ownership, which can be sold on any time you choose – so you can access your capital quickly if you need to.
The regular fixed income will always be highly attractive to your potential buyers, giving you excellent opportunities to achieve significant capital growth regardless of market conditions.
Since they are classified as commercial property, they are not liable to Stamp Duty Land Tax below £150,000; nor are they subject to capital gains tax on resale.
Too good to be true?
It might seem so to a buy-to-let owner struggling along on 5% gross, but we already have 16 operational properties delivering these 8-10% NET annual yields to thousands of buyers.
It’s largely down to the established long-term business model adopted by our developer partner.
This model allows them to buy prime sites where demand is assured, splitting the costs of the freehold and construction between multiple owners. The same principle applies to operating costs, which increases the NET income generated by each development.
The developer retains the freehold, preferring to make a profit from sustained rental growth in the future, rather than from an inflated initial sale price.
This means that because they’re in it for the long haul, it’s in their interests to build the best quality, best equipped properties and then look after them well – which coincides exactly with a buyer’s requirements.
“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”
– Paul Samuelson, Nobel prize-winning economist
No thrills investing
It’s true that you’re not going to get much of an adrenalin rush from buying one of our properties; but then most of our investors choose us precisely because we provide a solid, dependable income with fully flexible resale options and every chance of significant capital growth.
No thrills, no spills and not a finger lifted. We think Mr Samuelson would approve.