Property – alongside cash, bonds and shares – is one of the four most common types of investments. Property investment takes many forms, from pooled funds to buying a house to live in or let out. This guide covers your potential risks and rewards and where you can go to learn more.
· What can property offer investors?
· Risks of property investing
· Buying property directly – what to watch out for
· Indirect property investing through a fund
· Before investing in property
· What can property offer investors?
With property, there are two main potential ways to make a return:
· Rent – you can earn an income by letting out property to tenants.
· Selling for a profit – if you buy property and later sell it at a higher price.
Even if you don’t want to buy a property yourself, you can get these potential benefits indirectly by investing in a property fund that invests directly in property.
There are also other related ways to invest, for example through property maintenance and management services.
Risks of property investing
Property prices and demand for rentals can – and does – go up and down. That’s why direct and indirect property investments are for the long term. If you’re willing to wait, you can ride out the losses in a slow housing market and earn profits again when times are better.
If you’re over-invested in property – for example, if most of your money is tied up in a buy-to-let property – you may end up in trouble when housing markets slow. To avoid this, you should diversify your portfolio by holding different kinds of investments.
Buying property directly – what to watch out for
There are several risks when you buy property directly, whether for yourself or as a buy-to-let investment.
1. You can’t get your money out quickly – unlike shares or bonds, it takes a long time to sell property.
2. It’s a big commitment – when you buy a property, you’re putting a lot of eggs in a single basket.
3. There are buying and selling costs – with estate agent and surveyor fees, stamp duty, land tax, solicitors’ and conveyancing fees to consider. From 1 April 2016, you’ll have to pay an extra 3% on top of each Stamp Duty band when you buy an additional home or a residential buy-to-let property.
4. It’s demanding – doing maintenance work and managing property takes time and money. You may need to extend the lease – if you don’t own the freehold outright. This is another cost and can take some time to negotiate.
If you use a mortgage or a loan to buy property, there are additional risks:
1. There’s no guarantee you’ll earn enough rent to cover loan repayments.
2. The cost of the mortgage might rise.
3. If you don’t keep up with repayments, the bank or building society can take back the property.
Indirect property investing through a fund
With a pooled (or collective) property fund, a professional manager collects money from many investors, and then invests the money directly in property or in property shares. Fund managers charge a fee for this service, which will affect your earnings.
These are all common examples of property funds:
· Real estate investment trusts (REITs)
· Shares in listed property companies
· Property investment trusts
· Insurance company property funds
· Property unit trusts
· Offshore property companies
Before investing in property
Before you make any decision about investing in property you should find out as much as you can. You can research the potential pros and cons on your own, or take advice. You’ll also want to look at whether a different type of investment might better suit your goals. These guides will get you started:
· Buy-to-let property investments
· Indirect property investments
· Diversifying – the smart way to save and invest