Putting money into bricks and mortar has paid off for many British homeowners. As a result, people investing in property have also often made a killing on their investments. Buy-to-let, let-to-buy or even property funds to spread the risk have been popular.
But making money through property is now harder, following property price rises and relatively static rental levels. As rental returns dwindle, investors rely more on increases in the value of their property. So is property still a good place to put your money compared to other investments, and how do you do it to maximise returns while minimising the risks?
Outlook for buy-to-let
Some commentators sound a cautious note when it comes to property investments. Buy-to-let was attractive a decade ago, says Mark Dampier, head of research at investment brokers Hargreaves Lansdown, but potential investors today should be careful.
There has been a wall of money going into commercial property lately, as other investment yields have fallen, he says, and I think thats the time to start being very careful.
And yet unlike shares, which take just days to sell, property investments can take months.
Yet some investors have done extraordinarily well out of property investments, Dampier concedes. If youve done really well over the last few years, then give yourself a pat on the back. But if youre just starting to consider it, then Id say dont get carried away. There are people whove done very well at buy-to-let, but theyre not the people whove bought the house next door, theyre the people whove really done their homework and looked at yields, and probably invested in other parts of the country.
And since most people own their own homes, Dampier adds, there is an argument for spreading the risk.
Do you want all your investments in one asset class? Or to put it more simply, do you want all your eggs in one basket?
Property funds a brighter perspective?
Other commentators are more enthusiastic. We take the view that commercial property in particular, like offices or shop buildings, is an important part of a managed risk fund, and that someone with money in a deposit account would get a better return for their money by looking at a fund which includes Stocks and Shares, property and fixed interest securities, says Nigel Greenwood, spokesman for HBOS which offers a managed income fund.
Greenwood suggests that buying a property to let can mean a large outlay, poor liquidity and a single risk, a managed fund is entirely different, he argues. The HBOS managed income fund has no entry or exit charges, but includes a one per cent annual charge of the amount invested, and a minimum investment of £3,000.
So as buy-to-let returns dwindle as property prices have soared, why are property funds still making returns? Keeping invested money in commercial property means a relatively stable income, making it a good value product for the customer, says Greenwood. We know the markets are slowing and there is less money to be made in property in the future, but thats residential and not commercial property and we believe there is a bright future there.
Property funds are increasingly accessible to small-scale investors, and make money on everything from hotels to parking spaces. Fidelity has just launched its Global Property Fund with a global portfolio of shares in commercial property companies and Real Estate Investment Trusts, and regular savings start at £50 per month, and lump sum investments at £1,000.
Having a balanced portfolio is crucial, says Alex Tarver, investment director at Fidelity International. Fidelitys investments take a global perspective, he points out, balancing shifts in the property market in Kyoto with those in Japan for example, and include companies investing in everything from prisons to garage forecourts across the US. Other options include Pacific Continentals Sky Capital Build Up Fund, which invests in residential property primarily in the north of England, and which delivered 21.64 per cent capital growth in the 12 months to December 2005.
But following massive house price rises in Britain, is UK residential property still a solid investment? At Charcol, senior technical manager Ray Boulger points out that property values have gone on rising since the War. But if youre going into the property market, either via a buy-to-let or a property fund, then you need to see it as a long-term investment, he adds.
Owning just one property means that rental voids the periods when the property has no tenants will have a greater impact, Boulger warns, although an investors gains are potentially greater. Far better to spread the risk, he suggests, for instance with schemes now growing in some university towns which give you a proportion of the rental incomes for the whole block, rather than the rentals for your specific property, and so reduce the impact of void periods. Using a management company for rented property can make life easier too.
Let-to-buy easy access?
For most property investors, long-term capital gain is the main goal, but the income earned from rent is also critical.
Let-to-buy offers an easier step towards building a property portfolio simply because over 70 per cent of the UK population already own their own homes. At its most basic, let-to-buy means letting your main residence while you go and buy a separate property, says Bill Sunner, MD of Landlords Only, a specialist mortgage brokerage service for investors building property portfolios.
Renting out a home you already own means you are not part of a chain offering more flexibility, and investors pay less than 40 per cent capital gains tax if they sell the property within the first three years after letting for the first time. Some homeowners choose the let-to-buy route because they encounter difficulties when trying to move. Others want to venture into buy-to-let, and start this way because it saves on house buying and selling costs.
Getting started
Discuss changing your mortgage to a buy-to-let loan with your current lender before you take out a new residential mortgage. But if you go down that route, you will be paying two mortgages and you need to be confident that you can do that, Boulger says.
Choosing a 100 per cent mortgage on your new property costs more, but the cost of the extra loan to value (LTV) is offset by tax relief on your buy to let mortgage, he says. And although most lenders expect you to sell and transfer equity to your new property, some lenders will work with homeowners who do not wish to sell their former property. At this point its always a good idea to talk to a mortgage adviser.
And to avoid the pitfalls, says Boulger, you realistically assess your propertys rental potential: If the property is not an ideal rental property, perhaps a romantic cottage in the country, then it might be better to reconsider, sell it and buy a separate buy-to-let property. Factors affecting the ease with which you can let a property include transport links, university student population and the demand for rented accommodation in the area.
Do your research, especially into the rental market, Sunner cautions. And prepare for rental voids, he adds, by stashing six months rent in an account so you can pay both mortgages if you lose a tenant. You have an asset which will go on increasing in value, he adds, and in the meantime, you have become a landlord.
Choosing the let-to-buy route can leave homeowners with two properties, both of which are increasing in value, and a steady rental income too, Boulger agrees. However if people are anxious about the property market, then they shouldnt get involved in let- to-buy, he believes. Many believe property will continue to be a good investment, whichever route you take.
