Misconceptions about property investment

Andrew Ward, Managing Director at Solomon Investment Partners, debunks some common property investment myths that stop many would-be investors from achieving their true financial potential.

Related topics:  Finance,  Property Investment
Andrew Ward | Solomon Investment Partners
6th April 2023
Andrew Ward 905
"Ultimately, property investment is a long-term business, not a means to ‘get rich quick’ and viewed over those longer timeframes, its record remains extremely good"

Over the last 20 years, the price of a typical British home has risen by over 130%. That average far exceeds anything that the interest on high street savings accounts would have delivered over that same period. Nevertheless, millions of families still watch their savings lose real-term value in banks and building societies, often because they are deterred from investing by common myths about the challenges involved.

“I’m not a risk-taker; it would never work for me”

This is a common misconception, typically based more on personality than on logic. Property has a demonstrably excellent long-term record of delivering both capital growth and a regular monthly income; across the UK, it has successfully built and protected the wealth of more than two and a half million private landlords. Nevertheless, many of those who wonder what to do with their hard-earned savings still believe that, somehow, ‘it just wouldn’t work for me.’

While it’s true that all forms of investment carry a degree of risk, property is seen as such a reliable asset class that it’s a major component of many institutional investment portfolios; used by banks, pension funds and others as a foundation for generating steady and respectable returns.

Ultimately, property investment is a long-term business, not a means to ‘get rich quick’ and viewed over those longer timeframes, its record remains extremely good. In most parts of the UK, it’s underpinned by intense demand and severely restricted supply – the most fundamental of market forces. Consequently, in the longer term, rental and capital values should trend distinctly upward.

“Investment only works for specialists and the very rich”

Almost anyone can invest, but there are plenty of pitfalls awaiting anyone who attempts to enter the market unprepared. The key is to seek the best possible advice. There are many professional advisors who are very adept at helping novice investors to develop strategies based on their individual goals and circumstances.

They can then identify and evaluate appropriate mortgage options, suggest suitable properties and locations, and provide advice and support with the property purchase itself. Using an advisor obviates that personal requirement to be an expert. It gives investors access to specialist knowledge and market research that, in turn, help to minimise risk and maximise the prospects for achieving better returns.

“I don’t have the time to manage property and tenants”

Investing doesn’t have to demand personal involvement and new investors often don’t realise just how ‘hands-off’ investment can be.

Rental management agencies specialise in handling things on investors’ behalf. For a pre-agreed fee, they will manage everything involved in finding tenants, collecting rent and keeping the property in good order. Since their income depends on their ability to maximise rental returns, they have a clear commercial incentive to keep their clients’ properties earning to their full potential.

What’s more, as specialists in many aspects of property letting and marketing, they can often apply their experience, contacts, infrastructure and economies of scale to achieve higher rates of occupancy than a new investor could if working independently.

“Repair costs wipe out any profits”

Repair and maintenance costs can be high for older properties, and those costs will inevitably eat into profits. However, expenses are typically much lower for new-build and modern conversion projects – which is to say existing offices and industrial and retail buildings that are then redeveloped to create new residential units. Built to modern standards, such developments should require minimal upkeep and, importantly, protect investors against the need to fund expensive energy-efficiency improvements in the coming years.

“Investment brings too much uncertainty”

Just as banks will often pay a fixed interest rate, some property investment companies and lettings agents will offer rental assurance agreements that promise a fixed monthly return, regardless of whether or not the property is occupied. The investor then enjoys a wholly predictable return because the risks of void periods and any attendant losses are borne by the other party. Such agreements are most often associated with new-build and modern conversion projects.

“The market conditions are wrong”

Currently, the issues that most seem to concern prospective new investors include rising mortgage costs, tax changes and the prospect of mounting energy-efficiency costs.

On that first point, the base rate has been rising – that’s true – but fierce competition between lenders has already seen some BTL mortgage rates start to decline. Affordability could further improve if, as expected, the rate of inflation falls towards the end of this year and the base rate slowly follows.

Tax hikes are always unwelcome but there are important ways of minimising the burden. One, for example, is to invest through a business rather than as an individual. This is the realm of specialist financial advisers, of course, and it’s important to emphasise the value that they can add. Tax considerations should form an important part of any initial investment strategy, and acting on good advice can make an appreciable difference to total annual returns.

On the question of house prices, numerous reliable sources have been indicating month-on-month falls. However, many regard this as a necessary adjustment following more than two years of runaway growth; a trend back towards more normal, more sustainable market conditions of the type that prevailed before the pandemic.

And while the market finds a new balance, any short-term dip in values presents an opportunity to invest at more affordable prices. That, in turn, means the chance to achieve better yields. Thereafter, returning capital growth seems very likely, thanks to the enduring gulf between supply and demand. That, together with low unemployment, rising earnings and an improving economic outlook, augurs well for investors.

It's also important to recognise that investment isn’t only about capital growth, of course. Rental demand has remained extremely strong, so even if asking prices stagnate for a while, residential property should still deliver a rewarding monthly income.

Annual rental growth rates have been impressive in recent months, in double figures according to some sources, so on that basis alone, property is proving its ability to resist the erosive effects of inflation better than most other assets, and certainly better than any conventional bond or savings account.

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