The Pros and Cons of Property Investment

Can you win at the property game?

For many, property investment has been a way of building wealth and security. The property market has seen huge growth over the years, and it is still possible to create a successful property portfolio.

The average rental yield is around 3.5% but it can be more than this depending on the area of the property. The rental yield is the amount that you can expect to earn over a 12 month period, which is calculated as a percentage of the property value. The rental yield is the amount that is left after all expenses have been paid. Before purchasing a property it is important to calculate this cost to know if it is a profitable investment.

You may be wondering if property investment is right for you. Before making a decision it is important to weigh everything up. Buying property is an expensive purchase and you should have all the facts before making a final decision.

Benefits of Property Investment

There are many benefits of property investment, some of them are:

1. Higher growth than bank interest

If you have a lump sum of money in the bank you may be getting some interest, but ask yourself if you could get a better return from investing it.

Investing in property will give you a much higher return than the tiny interest rates that the banks offer. The benefit of using your money for property is that the value of the property can go up and you can get rental profit each year, which gives you two opportunities to make money.

Bank interest rates used to be three times higher than what they are today, and with the pandemic and economic crisis, this does not look set to improve.

If you know that you will not need access to this money in the short term then this is an option to consider.

2. Pension Alternative

Some people prefer to invest in property as part of their pension plans. This has become a viable pension option because of the potential returns that can be gained. Each person is different, and some people may prefer to rent their property to get a regular monthly income during retirement, while others may sell it to get the lump sum.

If somebody is retiring there is also the option to sell their current property and downsize. This then frees up money to invest in a second property. This is a great way of getting a passive income. If everything goes well there will be no issues with the rental income.

If you have reached retirement and are not sure about investing in property there is also the option to rent out a room, if you are comfortable doing this.

3. Increase In Value

Although there are risks, there is a good chance that a property that you buy will increase in value.

House prices have continued to rise in many areas. If the property that you purchase increases in value this means increased wealth for you. Even if the value falls you can hold on to the property until the market improves. While you are waiting for the house to go back up in value it can be rented out. The good thing about the property market is that it always recovers eventually.

If you have an investment property that you would like to sell this would be a good time to do it. There is currently a shortage of houses being sold which has in turn seen increased demand. This makes it a seller’s market, and you can comfortably sell your house for a decent profit.

4. Smaller Risk

Although property investment does have some risks it is a lot safer than some other forms of investment.

An example of this is the stock market. If you do a bad trade and lose money the money is gone forever. Property is considered a safer investment.

Having a property for a longer period of time reduces the risk. Over time there is more equity in a house which can be released when needed.

Negatives of Property Development

Although there can be great rewards and wealth with property investment, sometimes things can go wrong. Some of the things that could go wrong are:

1. Bad tenants

Every landlord wants to have a good tenant. Unfortunately, things do not always go to plan. A tenant may fall behind with their rent due to losing their job or other changes in personal circumstances. Occasionally a tenant may stop paying simply because they want to live rent-free.

When a tenant stops paying rent it can have a significant financial impact on the landlord. The landlord may have to go to court to remove the tenant from the property. The cost of the court fees has to be paid by the landlord, in addition to the lost rent.

Bad tenants may also ruin the property. Tenants have been known to ruin walls and doors, leave the house with mountains of rubbish and filth and the landlord has had to pay to put this right.

2. Higher Purchase Costs

It costs more for a landlord to purchase a property. Investors have to pay a higher deposit than regular homebuyers. Some lenders will ask for you to pay a 25% Deposit, this would be 25K for a 100K property for example. This means that having some money upfront is a must.

In the UK stamp duty is payable. Since the pandemic, there has been a stamp duty holiday, which has led to an increase in property purchases. The stamp duty holiday is due to end at the end of March 2021. Once the holiday ends there is no stamp duty for purchase up to 125K. There is a charge of 2% for properties between 125.1K and £250K and 5% for anything that is above 250K. This additional cost can be a turn off for potential buy to let investors.

3. Cost of Repairs

Another cost to consider once the property has been bought is the cost of repairs. As the landlord, you would be responsible for fixing anything that goes wrong with the property.

Jobs such as replacing the boiler, fixing drains, or repairing the roof can be expensive. It is important to consider prior to investment if these are costs that would be affordable to you.

If you do not fix things around the house then the tenant is within their legal right to refuse to pay rent until the job is fixed.

Solutions To Potential Problems

The good news is that there are steps that you can take which would help you if things go wrong. Some of the contingency steps that you can put in place are:

1. Guaranteed Rent Letting Agents

In recent years some letting agents have introduced a program that guarantees that a landlord gets their rent. This means that even if a house is empty or the tenant stops paying the letting agent will cover the cost.

The landlord has to pay a higher price each month to the letting agent to get this service. Paying this additional cost will give peace of mind. If you decide to sign up for one of these programs always check the small print to find out exactly what you are covered for.

2. Insurance Policies

The first insurance policy that may be worth considering is repair cover. There are many policies that are available to buy to let investors. The benefit of this policy is that the insurance company will cover any large repairs, as long as you keep up with the monthly payments.

This type of policy is beneficial because some repairs can cost thousands. It is important to check what the policy covers prior to taking the policy out. Some policies may have exemptions, for example, no cover for natural disasters.

3. Deposit

If you are in a situation where you would like to invest in a property but don’t have the deposit there is the option to go into a joint venture with somebody that has the capital.

Many investors would be happy to lend you the money and act as a silent partner. This would mean that you would do all the work, and any profits would be split with the person that provides you with the capital.

4. Buy Below Market Value (BMV)

Some companies will allow you to purchase a property for less than its market value.

These properties are cheaper due to the seller’s circumstances. Occasionally people are in a rush to sell and may sell a property for less than its value to move quickly.

One benefit of BMV properties is that a lender may allow you to pay no deposit.

Final Thoughts

There are many things to consider when considering buying a property to let.

Although there are risks in property development these can be managed by making educated decisions. Many people succeed in the buy to let market, and it is possible to build wealth through property.

Looking at property as a long term investment is beneficial, because it often takes many years to see a sizeable return.

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