Investing in property or “bricks & mortar” has been a popular asset class of investment for well over two decades now. It was so popular the Government had to step in, and make it less attractive as an investment, by creating new laws and tax rules, to try and prevent so many people from doing it.
Whilst many people have the ambition of buying and owning their own home at some point in their lives, others realised that they could make money, and significant sums of money, not just by owning their own homes to live in, but also by buying additional properties to develop and sell, or keep and rent out.
Those lucky enough to have thought of this idea years ago, and who got in early, have been rewarded with some very good returns.
Research has shown, that long term buy-to-let returns over the previous few decades, averaged about 16% per year, compared to just 6% for UK equities. From this data, it is clear to see why so many people were tempted into property investments.
A quick word of caution though before I explain the different ways you can invest in the property market.
Much of the previous decade's positive returns, can be put down to the meteoric rise in house prices over the same period. If house prices don’t increase at the same rate, then overall returns will be much lower in the future.
In addition, as mentioned above, new laws and tax rules also make it less efficient to invest directly in property, and so that will also have a negative impact on your overall returns.
Buy to let
Investing in buy-to-let property is about both capital appreciation, and income generation from rent.
Historically a sure-fire winning strategy for direct property investment, was that of buy-to-let (BTL). You would need to have a modest deposit and BTL mortgage for your selected new property, and the estimated rental income would need to be more than 125% of the interest-only mortgage repayments.
Once you had secured your BTL property, a quick once over with a paintbrush and hoover, and then straight on the rental market.
When your tenants are in, they should end up paying your mortgage, whilst you sit back and enjoy the house price appreciation.
Five years later, your house value has doubled, the tenants have been paying the mortgage for you, and you can then sell up and cash out, or perhaps use the equity in the property as deposits for another two or three properties, and then repeat the cycle again, as so many landlords have done.
This, of course, is an ideal situation, giving you an example of how BTL can work if all goes to plan.
The reality though can be much different, as being a landlord is not all plain sailing.
You may get periods of no rent when you can’t find a tenant, or you may have a difficult tenant who doesn’t pay the rent and requires legal action to force payment or to begin eviction proceedings.
If you don’t use a letting agency with a services division, you may find yourself being on call 24 hours a day, 7 days a week.
Tenants could be phoning up with any number of problems, such as the heating has broken down, the shower doesn’t work, the cookers broken, the frying pan handle has fallen off! Yes, they will expect you to do everything.
And what happens if the housing market doesn’t go up at all, or worse still, goes down? It is very difficult to turn a profit in a flat market, and impossible in a declining one.
I was a landlord for over 20 years, and for the first decade of that period, in the late 80s and early 90s, house prices didn’t go up at all. They did make up for it in the following decade, but it does go to show, that house price growth in the short or medium-term is not guaranteed by any means.
The UK average house price graph clearly shows a declining and flat market, for the decade between 1989 and 2000. The market picked up significantly from 2000 to 2008, ensuring my time as a landlord was ultimately very successful, despite the previous decade producing no capital growth at all.
The future of BTL
For most new private investors, BTL no longer stacks up financially, thanks to the new laws and tax reforms mentioned earlier, along with the current high prices.
Landlords can no longer offset their mortgage interest costs against rental income for tax purposes, nor can they use a 10% wear and tear allowance as another tax-deductible perk.
These changes, along with a stamp duty surcharge of three per cent on new second property purchases, high property valuations and projected low house price growth in the future, means BTL is now increasingly expensive to get into, and much less profitable than before.
Property development or buy-to-sell (also known as property flipping), is a strategy in which you would buy a property, hold it for a short time, and then sell it on again as quickly as possible.
For this strategy to be successful, you will generally need to buy a property that needs work doing to it, whether that’s upgrading the interior or converting the loft into an extra bedroom, or even adding an extension. You need to add some value in order to make it worthwhile, as you cannot rely on house price growth alone when you sell the property.
Once you have made the necessary renovations, you must factor in the cost of all the work, legal costs and buying and selling fees, plus any tax you will have to pay, and then you market the property, hopefully selling for a profit.
The more work carried out, and the greater the value-added, the bigger the potential profits could be, but also the potential risk increases.
If property development is an option you think you may consider at some point, it’s probably a sensible idea to start with a small project, so you can learn all about the process in a controlled way, and importantly, find a group of reliable tradesmen who you can trust.
Some people have made great profits and house upgrades by buying run-down properties as their main home, renovating them to a high standard, and then moving on to a bigger project once complete. This can mean, that after three or four renovation projects, these homeowners can live in a lovely home, that would usually be well outside of their price range, if measured on their salaries and potential mortgage multiples.
Property crowd funding
Although running your own BTL empire or property development business can be both rewarding and profitable, it can also be very time consuming, and problematic on occasions, not to mention very messy and dusty as well.
Fortunately, modern technology now allows would-be property investors, to gain exposure to both residential and commercial property projects, without the large costs usually associated with them, or the hassle of buying, running, and selling.
Property developers need funds to buy and develop properties, and they are now able to crowd fund this money, via peer to peer lending platforms.
They can borrow funds for medium-term developments, or short term bridging loans, and the loans are usually secured on the property, in a similar way a conventional mortgage is.
As an investor, you can get involved with these loans from as little as £100, and receive monthly interest payments, or on some platforms, the payments are at the end of the project, when the property is sold or re-financed.
Interest payments can range from 6% to 12%, but there is no guarantee of this, and you could lose some or all of your money. Again, remember the “risk v reward” page!
Rental income and part ownership
If you like the idea of owning a stake in a property and earning rental income, and some potential capital gains from house price growth, but without all the hassle of buying, renovating and letting, then there are also other peer to peer platforms that let you do just this.
With low entry investment levels from about £100, you can crowd together with other like-minded investors, and legally buy a part share of a property, and be entitled to any income and capital growth, in the same proportions as your overall ownership.
As an example, if you invested £1,000 in a rental property investment worth £100,000, then you would own 1% of that property and would be entitled to 1% of the income, and 1% of the overall growth when it is eventually sold.
Your partial ownership of the property is legally noted in what is known as an SPV, or Special Purpose Vehicle, which is designed for multiple ownership purchases such as these.
You don’t always have to invest in just a single property either. Depending on which platform you use, investors can opt to spread their investment over a range of different properties, thus maintaining the benefits of income and potential capital gains, whilst limiting some the risk, if an individual property went wrong somehow.
There are several slightly different versions of both property loan and equity share platforms, and so it is a good idea to carry out some thorough due diligence on the companies behind them, before investing any significant amounts of money.
Property company shares and funds
The easiest way of getting involved in property investing is simply to own a selection of property company shares, or property funds.
There are all sorts of different themes to choose between, such as commercial property, residential property, UK only, European, North American, or even worldwide funds.
Property shares and funds are usually considered to be uncorrelated to the wider stock market, meaning they don’t behave in the same way as other stocks would, during the ups and downs of the economic cycle. They also produce a reasonable ongoing income from rental payments, which can help smooth returns.
Exposure to a property fund would be the simplest and safest method of investing in this asset class for most new investors to start with.