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
