Property ownership is a national obsession. In Europe it’s much more usual for people to rent their home instead of owning it and the desperation to get “on the ladder” seems to be much less. What about property as an investment? For many people it seems to be the go-to asset, but should it be? Certainly, there are many options out there, but I think for a number of investors that physicality of bricks and mortar adds some sense of security.
Alongside that, of course, many have seen their property increasing in value and think that this is the norm. Often forgetting, or not recognising, the “gearing” impact that having a mortgage can have in a rising market, by improving the actual returns received. Also less well understood is that gearing works both ways and it’s not that long ago that the spectre of negative equity stalked the land.
There are several things that impact how the investment world sees property. Firstly, the cost of entry. It takes significant capital to get access to property directly, either as a full purchase or with a mortgage and then you have got all the additional costs, such as legal fees and stamp duty. Remember that if it’s an investment property you are likely to be paying significantly more in stamp duty and interest than if it were your home.
Once you’ve got your investment property, you then need to find a tenant, which is not necessarily the easiest thing if you want to find a good one. Alongside this you need to remember that tenants rent for a reason and it may be that you see some fallow periods when you’ve still got costs and no income coming in will affect your returns. You also need to maintain the property and this could be quite a big cost, especially with the impact of green legislation yet to come.
Luckily, you can offset some costs, such as maintenance and accountant fees against your income. If you’re a higher rate taxpayer you are not able to offset your full mortgage costs against your rental and instead get a 20 per cent tax credit. So, only half as tax efficient as it once was.
Did I mention that it’s likely that you’ll need to fill in a tax return? Not the simplest thing to complete. So, perhaps after a number of years of successful property investing you decide you need some capital out of your asset or you want to sell it?
Well, the former is difficult as you would likely need to find a mortgage, which, if you are retired, may be tricky and there will be associated costs. If you do decide to sell entirely then as an investment property, you are going to potentially be liable for capital gains tax on any profit made. This is not at the rates for normal investments, typically 10 or 20 per cent, but rather at 18 and 28 per cent. Assuming that you can find a buyer at a price you feel is reasonable of course, which can take some time. As an asset we do view property as illiquid for this very reason.
As you can see, any investment property is not without its risks, anyone considering it should look at these issues very carefully before taking the plunge. I think that the wise investor diversifies their holdings at every opportunity and while rental property can certainly have a place in a diversified portfolio, do not forget the mundane opportunities that can add accessibility and tax advantage, such as pensions or ISAs. I would say that having all your eggs in just the one basket is rarely a wise move for anyone.
*Jerry Sisk is a Financial Planner at G+E Wealth Management, www.gewealth.co.uk