When you have considerable savings, or have been paid a bonus or inherited a large sum of money, an important consideration is whether you should opt for property investing or equity investments as a long term investment.

This is a popular question we are regularly asked as property consultants with regards to investment opportunities. Ultimately, your investment strategy will depend on your financial situation, risk tolerance, long term goals, current mortgage deals, the performance of the stock market and your investment style.

Both types of investment are ultimately excellent ways to earn a passive income in their own right but we will go through the reasons why we recommend you to invest in property.

Property Investment UK

It is important to highlight that there are different ways you can invest in property.

The most common way is by investing directly in residential property or commercial property by buying a property outright which will then be used as a buy to let rental property.

Alternatively, if you don’t have enough funds to buy a property outright you could take out a Buy To Let mortgage and seek to cover your mortgage interest payments or other upfront costs by meeting rising rental demand with a set monthly rental fee.

With regards the rental fee, the value will depend on similar properties as well as demand. In some cases when there is more demand than supply you can get offers over the advertised amount. This should enable you to turn a profit once mortgage payments have been accounted for, especially now that inflation is rising and we are seeing instances of this more often.

What if you don’t want to invest directly into property?

You can indirectly invest in property by pooling your money with that of other investors in a fund, which then invest in different properties (e.g. a Real Estate Investment Trusts or REIT).

This latter approach is popular amongst investors who want to incorporate property investments into their portfolio, but are perhaps young professionals that lack the funds to buy a house outright to get onto the property ladder currently, or who do not want to take out property loans. It may be that they have more of an interest in the fast pace of the UK stock market.

Whether you decide property investments are right for you or prefer the stock market route, you need to be aware that both come with varying costs involved such as capital gains, upfront costs, legal costs, risks and various impacts to your tax bill that should all be taken into consideration.

If you are unsure we recommend also seeking independent financial advice and see that type of investment is suitable for you.

Here are the 6 benefits of investing in the property market

You have direct charge of your property portfolio

As an investor you can decide on your property investment strategy from what properties you are going to invest in (off plan properties, buy to let property, commercial property), the area, the type of property, which tenants to rent to, how much rent you want to charge and how the property is managed.

You can also choose how how hands-on or hands-off you want to be. Some investors choose to be very hands-on and manage their portfolio themselves while others who have multiple properties tend to outsource the property management of their rental properties to property consultants who will advise on sourcing the right property to finding the right tenants and supervising ongoing maintenance and repairs.

When you buy investment properties you also acquire physical land or property, ie a tangible asset.

2. LEVERAGE

Investing in property means that you can secure leverage, a loan or mortgage in order to maximise your own investment. For example you can take equity out of one property once it has had a certain level of capital growth and use those funds to either improve or extend the property to further increase its value or out the money towards another investment property.

You are unlikely to be able to secure a loan from a bank in order to increase the amount of money you have to invest in equities, in contrast, compared to investing money in UK property.

 

3. INCOME

The return you receive from property investment is split into capital appreciation and cash flow.

Most property investors make money by collecting rent (which can provide a steady income stream) and through appreciation, as the property’s value goes up compared to the property purchase price.

Capital appreciation is the increase in value of the property itself and cash flow is the profit you make each month from rent. If you are investing wisely, as well as improving the value of the property over time, you should also receive a positive monthly income. Even taking into account void periods, this income is steadier than other forms of investment.

This is one of the main advantages of property investment. Usually due to high tenant demand you can expect a stable and increasing income on a regular basis. This is great if you are looking for some passive income or are retired.

Something to bear in mind is that you may experience instances of rent arrears or void periods between tenancies, which is why a less riskier strategy is to try and have several properties in your portfolio, ideally under a property company or property business structure for tax relief.

You should also think about the income compared to the value of the property. This gives you the gross rental yields, and is a way to compare different investment properties vs other types of investments.

Don’t forget that income from properties is taxable as income, which can mean you must pay corporation tax at 20%, 40% or higher.

4. INSTANT GAIN ON YOUR INVESTMENT

If you purchase property at below the market value you will, in many cases, instantly add value to your investment simply by buying cheap or run down physical property in the UK.

When you buy an off plan property you can also negotiate with the property developer for a lower property price compared to buying a property through estate agents and therefore make profit from selling at a higher price or through rental yields.

5. INCREASING VALUE

Unlike other investment vehicles, investing money into the property sector is a valuable investment where the value can increase significantly compared to the UK stock market.

This is particularly true if you invest in an off plan property or in an area that is developing or regenerating where property prices are very likely to rise.

 

6. INFLATION

Investing in property is how as an experienced investor you can hedge against inflation. With high inflation, as we are seeing in current times, your rental income and property value are likely to increase significantly. As the cost of living goes up, so will your cash flow, which will help you make more profit after you have accounted for mortgage repayments and maintenance costs.

So when weighing up whether to invest in buy to let property or property funds, some advantages are definitely the direct control you have as the property owners, the fact that in then UK, properties have generally increased in value over the past 50 years and the high tenant demand fuelling property developers to seek new property development sights to meet the rising UK property market.

However the flipside are the taxes, for example if you sell a second home, you will have to pay capital gains tax (CGT) on any increase in its value since you acquired the asset.

Also its not as easy or quick to liquidate or sell a property compared to shares, for example.

If you are looking for advice or are looking to purchase a property in the UK. do get in touch as we can help advise you.

We’re experts in both residential and commercial real estate, and will work with you personally to ensure your investments are worthwhile and serving your best interests.