property investment: understanding your personal requirements
Asking which is the best way for you to get into property investment is like asking how long is the proverbial piece of string.
There is no right or wrong answer to this question. Or, more accurately there’s no one-size-fits-all answer. The best investment route for you to get into property depends on your individual circumstance, needs and ambitions.
And so on that, let’s take a look at some of the considerations.
How much do you have to invest?
One of the most important questions in deciding which is the best route for you to get into property, it's vital you understand your available investment budget.
Houses are not cheap. Of course, there are huge regional variations: in July 2017, the average price in London was £488,729, whereas in the North East is was £132,999.
These are selling prices, but what about the cost of building? Again, it differs enormously depending on the region, but, as an indication, it’s estimated that the cost of building a house ranges from £300 to £3,000 a square metre. Recent analysis has found that the average living space in a UK house is now 67.8sqm. That doesn’t include hallways and staircases, so it could realistically be rounded up to 70sqm, which gives an average build price of between £21,000 and £210,000.
If you have that kind of money, then you could consider buying land and building a house, or houses, for sale. Or, you could invest in buy-to-let, or buy a house, improve it and then sell it for a profit.
If the capital you have to invest is at a more modest level - or you're looking for a more 'hands off' approach - there are plenty of alternatives, which could involve you sharing in the market through a more indirect route. This could be by buying listed shares in a housebuilding company, shares in a in a Real Estate Investment Trust (REIT), a property bond, or by buying shares in a property joint venture (JV), through a co-investment/crowdfunding platform.
In all these cases, you can invest almost as little as you want, giving you the ability to 'test the water' if preferable with a smaller outlay than needed with other forms of property investing.
Getting your portfolio balance right
A basic principle of sound investment is to maintain a diversified and balanced portfolio. This is a grand way of saying 'don’t put all your eggs in one basket'.
If you invest only in one type of investment, you’re exposed to any adverse events to hit that sector. If, for example, you already own a house for buy-to-let or for resale and you are considering acquiring another, it might be wise to look at another town or region.
Similarly, if a major local employer goes bust, that can hit house prices and rental values.
If you already have capital tied up for a year or two in a housebuilding project, you could invest in listed shares in a housebuilder - for example - as these can be turned into cash into short notice should you need it.
What do you know?
Building a house isn’t rocket science. On the other hand it’s not something you’d want to trust to someone lacking a significant level of expertise and experience. It calls upon a number of skilled trades, from bricklayers, to electricians, plumbers and plasterers. You also need a knowledge of the market. Where are houses likely to be in demand and what kind of houses?
Buy-to-let doesn’t necessarily require the same knowledge, but, to be successful, you still need expertise and experience. The days of 'easy money' in buy-to-let are over. The government brought in an additional 3% Stamp Duty charge for second homes, making the purchase of investment properties more expensive, reined in some of the tax reliefs and introduced more restrictive underwriting rules. Following this, property experts Savills found that mortgaged buy-to-let market purchases have fallen by 43%. To make money now in buy-to-let, it’s important to know the market and a detailed knowledge of property values.
An attraction of JV property investing through a co-investment model is that the lay investor can buy shares in specific developments, or group of developments via an online platform, investing in partnership with the developers and builders - who do know the market - and experienced investors.
What are your timescales?
A housebuilding project can typically take two years. If you buy a house for resale at a profit, you might have to be prepared to wait longer. The long term trend for house prices in the UK has been upwards and is likely to continue on that trajectory, but prices don't often rise in a straight, smooth line - there are periods of stagnation or even slump.
If you are unfortunate enough to be holding a property during one of these periods, you have to be prepared to wait, with your capital tied up, until the market revives.
How much liquidity do you need?
On the face of it, property funds allow you to access your money at short notice, but that’s not always the case. A number or investors got their fingers burnt in 2016 in the wake of the Brexit referendum result when there was a rush for redemptions as people sought to get their money out.
But, the shares were ultimately based on properties and properties can’t be sold instantly. Property funds run by Standard Life, Columbia Threadneedle, Janus Henderson, M&G, Aviva and more suspended withdrawals.
What level of involvement do you want?
Involvement doesn’t only include the time spent in managing your investment, but also the time you have to devote to researching the investment choices and the market. It’s obvious from the above that direct investment in the housing market – building, buying to improve and sell and buy-to-let - all require significant input of time and labour to acquire and project manage an investment, as well as marketing it.
Investing in shares, however, whether in a listed building company or through a property JV, doesn't generally call for that level of involvement. In the first case, you are adopting the role of developer, with all that that entails, whereas in the second, you are taking the role of investor.
That doesn’t mean you don’t have to undertake some research. Any investments, in property or any other asset class, should always be gone over with a fine toothed comb, not only to ensure they are sound in themselves, but also that they are the right investment for you.
What level of risk are you happy with?
Again, this is a key question for any investor to ask himself. Your attitude to risk will depend on a number of factors, such as:
- Your personality
- The amount of money you can afford to lose if things don't go as planned
- Your age (as you approach retirement, you may want to secure your savings and not risk them)
- The state of the market
As always with all investments, the higher the risk, the greater the potential rewards. You can make a lot of money out of buying houses, but you also risk losing a lot.
Buying listed shares is generally seen as being safer, but the potential rewards are lower, whilst buying shares in a JV property development could allow you to share in the kind of profits normally reserved for the bigger players, but your investment will be secured against the property. Also, you will be investing alongside the experts.
Taking time when investing in property
There’s a range of options if you want to get into property investing, more now than there have ever been, generally thanks to the new online platforms.
Without doubt a positive, the more options you have, the more there is to consider and it's vitally important you take the time to do your research and be confident you're choosing the right property investment for you.