Why invest in property?

When I started investing in property it was something that wasn’t as widespread as it is today. I purchased my first investment property in 1994 and it was only shortly before that Buy-to-Let mortgages had become available. I was driving into work listening to a programme on Radio 5 live. The report stated that if you were looking to invest in property that the best forecast capital growth at that time would be the North West or North East of England. I was living in London at the time and regularly visited the North West. I spent one and half years looking at properties in a Manchester satellite town called Ashton-under-Lyne. I was extremely worried by the prospect of being a landlord. What would happen if I had a bad tenant? What if they burnt the house down? What if we had a flood etc…. Eventually I managed to find answers to these issues and took the plunge and purchased a house in Minto Street. Now it is 2008 and the capital growth from that house has been in excess of 250%. It has been a great investment and helped me buy further houses. Even if there hadn’t been any capital growth it will still have been a good investment. I was receiving a yield of 15% and was making a healthy monthly profit. We are now in 2008 and a lot has changed in the world of property investment. The biggest change is that there has been a long and sustained period of growth. The capital growth has been great for equity increase but in my experience rents haven’t kept pace. I have worked out that rents in my area have only been increasing by 1 – 2% per year. It is now much harder to make any profit at all from property. In fact, if you factor in a 2 month empty period, most property investments are going to make a loss or break even at best (one of my friends buys flats in Docklands in London – he makes a loss on them each year but is happy with this as he views it as a pension and that he will need to make a contribution to it – he is happy to see the capital growth – my view is that I don’t want to make a loss and aim to break even as a minimum). Therefore anyone investing in 2008 has got to be banking that there is going to be capital growth in the future. It is true that the market is slowing down at present but I still think that investments that are purchased for medium to long term (5 – 20 years) will be a good investment. There is a shortage of property in the UK and with strict planning laws there will continue to be a demand for rental property. One of the most positive and pleasing effects of the credit crunch/Northern Rock effect is that I am starting to see significant rent increases. This is great news and will help stabilise and increase yields.

One of the realities about property investment is that it can be time consuming and isn’t risk free. My accountant told me that the Inland Revenue class profits made from property investing as ‘unearned income’. I disagreed heartily with him and told him about all the effort I put into my investment property, even while I was working full-time. He understood my point but said that this wouldn’t influence the Inland Revenue! The point I want to make here is that there are many easier and more passive investments; in fact property investment might possibly be the most difficult type of investment to manage. The reason why I invest in property is that I understand it. I know that if the value of a property reduces it will still actually be there. I do have some shares but I do not like stocks and shares as I don’t understand them and even experienced city traders aren’t always sure about what is going to happen. I think that they are a gamble and I don’t like to take risks that I can’t manage. I am sure that if I gave a stocks & shares investor a right to reply on this page that he/she would make a compelling case for the value of investing in them. I just don’t like them and have a low risk attitude to investing – not that everyone would agree with that!

The other issue is that there are risks with property investment. I have had to evict tenants, had fires and unpaid rent. I have created strategies to deal with these issues but they have been time consuming and sometimes stressful. It would have been easier to buy bars of gold or put some money in a high interest account. However the potential returns on these investments could not have matched historic growth or the future potential growth. I think the beauty of property investment is that you see growth on part of the house that you don’t even own. As an investor you get to realise all of the growth even if you have only purchase 15% of a house with a 15% deposit. This reason alone is a good enough reason to invest, capitalising from someone else’s investment – i.e. the banks, is a great scheme!