The age-old question – is property a good investment, should I go for it? If you’re wondering whether to put some of your cash into property investment, then we’re here to help offer some guidance. Unfortunately, it’s not a straight ‘yes/no’ answer.
As with any investment, there are many things that can influence whether an investment will be successful. And with property investment, there are a few things you need to consider and plan for. It’s not something to rush into without being well informed.
Current market trends are very alluring. House prices in the UK for example are at their highest level in two years. Confidence is growing in the property market thanks to a recent drop in mortgage rates.
In this guide, we’ll help you decide if property is a good investment for you.
The pros of property investment
There are many positives when it comes to property investment opportunities in the UK.
Potential for long-term capital appreciation
Despite recent seismic events like Brexit and COVID-19, long-term appreciation in property investment remains strong. As time passes, property values still tend to rise, and demand in properties in attractive locations only increases – which means substantial yield.
Steady rental income opportunities
The consistency of cash flow is amplified if you use the investment to generate rental income. Investors in real estate benefit from a steady, heady stream of money that can be used to purchase more properties and rent them out to more tenants.
This income can also be used to cover expenses incurred by owning the property, such as mortgage payments, taxes, repairs and insurance.
If market conditions or inflation start to take their toll, rental rates can be adjusted, which could even mean an increase on returns.
Tax benefits
Some of the main reasons property is a good investment include the various tax benefits and incentives.
Depreciation lets you deduct a portion of your property’s value every year as an expense – despite its value not decreasing over time. And lower tax rates can be leveraged on capital gains.
Diversification of investment portfolio
Real estate often has a low correlation with stocks and bonds, so it can provide a hedge against a volatile market, spreading out risk and improving the stability of your investment portfolio through diversification.
Greater control
Compared to mutual funds, stocks and bonds, property investment is more hands-on, allowing you the option to strategically update your property and improve its value.
The cons of property investment
If you’re still procrastinating and considering if real estate is a good investment, then it’s wise to take a deep dive into the pros and cons. Let’s explore some of them.
High initial costs and ongoing expenses
Unlike stocks and bonds, property investment involves a significant upfront outlay to buy a property. And then once you have a property, you need to pay for taxes, insurance and potential repairs, to name just a few ongoing costs.
Market volatility and economic factors
Real estate investment puts you at the mercy of potential market volatility. There are also different economic factors to keep in mind. The markets can be unpredictable, and susceptible to interest rates, recession, employment levels and consumer confidence.
At worst, should, for example, recession be long-lasting, it can result in plummeting property prices. This can lead to substantial losses for property investors.
Responsibilities of property management
Becoming a landlord isn’t for everyone. You may find it stressful and more time-consuming than you had imagined, due to demands from tenants and/or maintenance problems. You could hire a property manager to help free up your time, but that can be expensive.
Risks associated with tenant issues
Unreliable tenants can cause real headaches. They can damage your property, leading to expensive repairs. They can miss rental payments, leading to cash flow issues. And if all this leads to you having to evict them, that’s expensive too – and time-consuming if you have to find replacement tenants.
Specific challenges in the UK property market
In 2024, UK property is a good investment. But there are some specific challenges. Like the cost of capital for example, which has risen to expensive levels. At the moment, construction costs are pretty high. This puts some developers off undertaking projects that don’t give good enough returns.
Evaluating different types of property investments
Residential vs. commercial property investments
These are the two main types of property investment. Do you choose a residential property, or do you think commercial property is a good investment?
Commercial real estate includes offices, warehouses and hotels. You can benefit from a more reliable revenue stream with a commercial building, but you also need to think about higher insurance and maintenance.
Pros and cons of buying a rental property
- Pros – Tax benefits, passive income and reliable long-term residents are just some of the reasons rental property is so popular.
- Cons – No matter how well looked after, rental properties will need repairs, and they can be expensive. And as mentioned earlier, your investment is at the mercy of your tenants, to an extent, so choose wisely.
Shared ownership properties: benefits and drawbacks
Shared ownership allows first-time buyers and those that don’t own a home the chance to buy a share in a new-build or resale property. Purchasers take up a mortgage on the percentage they own, and pay rent to the housing association on the remaining share.
- Benefits – You have the chance to become an owner-occupier while keeping mortgage costs down. And as you only need a mortgage for the share you own, your deposit could be low, too.
- Drawbacks – Unfortunately, buyers using this scheme are responsible for paying full repair and maintenance costs. And if you decide to sell, the housing association have first refusal on the right to buy.
Investing in property through a trust
Buying a property and putting it into a trust will ensure your investment remains in the family after you have passed. Your assets will be well protected, and there are tax benefits, too.
However, you need to consider the often expensive legal and admin fees, the loss of personal control and limited flexibility.
Leasehold properties: what to consider
If you buy a leasehold property, that means you don’t technically own the building. You purchase a lease from the freeholder (or landlord) and pay them ground rent.
Although leasehold properties can be a relatively cheap and convenient way onto the property ladder, ground rent can rise and service charges can prove expensive.
Is property a good investment?
As you can see, property is a good investment, but it’s not something to rush into.
Our property investment team at MHG Wealth will be able to guide you into making the most responsible investment decisions based on your desired goal. Get in touch with our expert team today.
