Property as an Investment Option
Some Recent History
Two main “events” happened to facilitate this. The first was the introduction of the AST or Assured Shorthold Tenancy agreement (Housing Act 1988, amended 1996), which gave Landlords freedom of choice with Tenancies. Prior to this, Tenancy agreements were in various forms ‘protected’, with Landlords having to meet very strict legal requirements to re-acquire the property. Clearly, this limited the attractiveness of property for the everyday investor. This, of course, also coincided with the sale of council housing stock and helped pave the way for the private rented housing sector that we have today.
The second was the development of the means of financing this type of investment for the mass market, which became known as the Buy to Let Mortgage. Prior to this development in the mid 1990’s, financing options for property investments were very limited. My father, a landlord since the mid 1980’s, often comments, “If only these products had been available before”.
Why Choose Property?
Property has a solidity that other investments such as shares, pensions and cash do not and appeals to the British psyche. It is generally index linked and rises broadly with prices in the wider market. Property is a fairly flexible investment which can be bought, sold and passed onto the next generation, unlike pension annuities. Given developments with ASTs, even sales of properties with tenants in situ are becoming more common.
According to the National Housing and Planning Advice Unit (a non departmental public body), up to 290,500 additional homes may be needed in the UK each year until 2031. Even in the boom of 2008, less than 200,000 new homes were created. Clearly there is a substantial shortage of housing, which has pushed up rents in particular. This is also likely to see the capital value of property assets rise over the medium to long term.
As with any investment, property comes with the obligatory “small print”. Its appeal can also be a limitation as it is a fixed asset and should be considered as a 5 to 15 year investment. Whilst there are some 5 year mortgage options, better rates tend to be found on 2 to 3 year products, so remortgaging costs must be considered.
Property is not highly tax efficient, although most repairs, maintenance and management costs can be offset against income, though not improvements. Void periods, rent arrears, contingencies for repairs, insurance, gas and electrical safety checks and income tax must all be budgeted for. Of course the income has to come from somewhere and tenants can be rightly demanding, they are after all your customer as a landlord. However, this can be mitigated by employing the services of a professional letting and property management company.