The pros and cons of property investment
The best way to understand property investment is to understand its unique advantages and disadvantages.The advantages include:
- Spreading risk. If you’ve already invested in pensions, bonds, gilts and shares, property is an excellent way to diversify and create an income stream that you can access well in advance of retirement.
- Income generation. With the right property portfolio, it’s possible to earn enough to replace your employment income.
- Capital growth. Properties increase in value over time, and many investors see them as a potential pension pot.
Whereas the disadvantages include:
- Time commitment. As the landlord, you either have to deal with tenants or letting agents. The former will bring their maintenance requests and complaints directly to you; the latter will contact you regularly to discuss any issues that need to be resolved.
- Tied-up money. If you change your mind, it can take a while to sell your buy-to-let property — unlike shares, bonds or gilts, which you can offload relatively swiftly.
- Capital loss. As with all kinds of investment, value can go up as well as down.
- Income loss. Buy-to-let property investment relies on the tenants paying you — if they don’t, you won’t have any income, and you’ll still be liable for the mortgage.
Can I afford to invest in property?
It depends on the money you have and what you’re willing to invest. There are several additional costs to consider.
Property investment expenses can include:
- Conveyance costs and solicitor fees. Making sure the property is up to scratch can be a complex and expensive process.
- Stamp duty land tax (SDLT). If a property is registered in your name, you could pay a 3% surcharge on its value — assuming it’s a residential dwelling worth more than £40,000.
- Refurb costs. If work needs to be done on the property, you’ll have to fund it. You can offset some of these costs against your taxable income.
The good thing about property is you don’t have to pay for all of it upfront: with £50,000, you can buy a property worth £200,000 relatively easy.
Property investment strategy
As for which type of property to invest in, this will again depend on your individual preference and circumstance. There are four main kinds to choose from:
Single let properties are the most common kind of investment. It’s a house or flat let to one tenant or family under one agreement.
Houses in multiple occupation (HMOs) are your typical flat/house share situations: each tenant will have their own agreement, which will usually cover all bills.
Commercial properties such as shops and restaurants are taxed differently to residential properties. SDLT rates are cheaper than residential properties and the 3% SDLT surcharge does not apply. Section 24 mortgage interest relief does not affect commercial properties. All mortgage interest may be offset against the commercial property rental income.
Holiday lets and serviced accommodation have the tax advantages of commercial properties — 100% of the mortgage can be offset against holiday-let income.always best to seek out experienced financial advisers and accountants before making any big decisions.