There are numerous benefits to owning and investing in property. With carefully chosen properties, you can enjoy predictable cash flows, excellent returns, tax savings, and diversification, among others. And, you can use real estate to build financial security.
If you’re thinking about investing in property, here’s what you should be aware of and why property is an excellent investment.
Things to take away from this article:
- Investors who own real estate properties earn their money from rental monthly income, property appreciation, or profit generated by business activities that rely on the properties.
- Investing in property has several advantages including a passive income stream, stable cash flows, tax advantages, diversification, and leveraging.
- You must research property investment or speak to an expert before investing large amounts of money.
- Investors need to realise the risks and responsibilities of owning a rental property.
- It can take long periods of time to purchase, organise and rent out your property.
- It may be some time before you start to see the benefits and returns of your real estate investments.
- Property prices can change at any time.
Create cash flow by investing in property.
After all costs (mortgages) and revenues (rental income), there’s usually some left over for you. As long as you’re not paying too much interest, you may be able to increase your wealth by building equity in your property.
Breaks and deductions in tax you can achieve by owning property.
Investors who own rental properties can take advantage of various tax breaks and deductions that may help them save some extra cash when they file their taxes.
Depreciation is allowed for buildings but not land.
Since the costs associated with buying and improving an investment real estate property can be depreciable over its life (between 27 and 39 years depending on the type of property – residential property or commercial property) you can benefit from decades worth of depreciation that helps lower your taxable income.
Appreciation in property investment.
As a real estate investor, you may make money from property through rental income, any gains made from properties dependent on business activities, and increases in the value of your investments. Rentals tend to increase over the years, and with a good deal, you can make a profit when it’s sold. Profits can also be realized if you’re able to sell your properties for a gain.
Create wealth and equity for yourself using real estate.
As you repay a property loan, you gain equity—a financial tool that increases your net worth. As you gain equity, you have the power to purchase more properties and boost your income and net worth further.
Property gives you portfolio diversification.
One advantage of buying an investment property is that it offers diversification benefits. Real estate tends to be less volatile than stocks or bonds. Therefore, adding real estate to an overall investment portfolio can help decrease volatility and increase returns.
Leverage is the using borrowed capital such as a loan to increase an investment property’s potential profit return. For example, a 20% deposit on a property’s mortgage will get you 100% of the property you want to purchase and invest in—that’s leveraging to obtain an asset such as property.
Competitive returns in property investment.
Depending on the property type, location (if your property is in a prime location it is more likely to bring in more rental income), and property management company, some properties return better than others. However, most property investors would agree that beating the average performance of the S&P 500 in the stock market is an important and achievable goal.
Using property as an inflation hedge.
Inflation hedges can help protect against rising prices. When an economy experiences high inflation, people may choose to invest in assets that are not subject to price increases. For example, if the government decides to increase property taxes, investors may decide to sell stocks before they lose value because they know they won’t receive any additional income. However, owning a home is different because homeowners do not benefit directly from tax soars, they have the ability to pass some of the inflationary pressure on to their tenants. Rather, homeowners gain equity through increased land values. Thus, when inflation rises, homeowners may see an increase in the value of their homes.
Is my primary residence a property Investment?
A primary residence is usually not thought of as an investment because it is used as one’s home. However, you can still benefit from selling your home at a price greater than you originally bought it for. If this happens, you might be liable to pay property taxes on those profits.
Is a buy-to-let property investment still a profitable one?
It largely depends on the type of investments you want to invest in, and the ultimate goal behind your investments, for example, why do you need the money, do you need quick funds or are you in this for the long term?
Here are some advantages and disadvantages of using a buy-to-let property as a way to generate a return on investment.
Advantages of buy-to-let investment properties.
Investors will gain revenue through rent (possibly less than in the past). In some parts of Scotland, such as Glasgow and Edinburgh rental yields are as high as 8 percent. Other parts are considerably lower at the 3 percent mark.
As well as rental income, you could gain capital growth as you add value to your property or house prices increase whilst you own the property.
You can take out an appropriate level of liability coverage in case any damages are caused by your tenant(s) or their guests. This gives you extra security with your rental property
Disadvantages of buy-to-let investment properties.
You’ll pay more taxes now than before because of your increased income.
You won’t be able to earn any income if the property isn’t occupied.
If the house prices fall, your capital gain will reduce accordingly. And if you have an interest-only buy-to-let mortgage then you’ll need to pay to make up for any shortages if the property sells for a lower price than you originally bought it for you may be at a loss in the end.
You’ll also have to take into account the costs of stamp duty and insurance, as well as damages and or maintenance.
Landlords have a lot of responsibilities including tenants’ well-being and the safety of the home they’re renting from you.
Many people opt for buy-to-lets as a way of generating an additional source of income when they retire using some of their pension money to put down large deposits. Sometimes renting out property can make more than pension retirement income depending on the circumstances.
It’s important to speak to an accountant or financial advisor before touching your retirement savings. You could potentially face serious tax penalties or consequences if you’re not careful.
The current state of the buy-to-let property market.
According to figures from UK Finance (which tracks the UK real estate market mortgage lending), there were 64,500 new purchases of property for residential use by landlords in the 12 months ending March 31, 2020, down from 72,300 in the previous 12-month period and 73,300 in the year before.
Meanwhile, FCA statistics show that buy-to-let mortgages account for approximately 12% of the total volume of new mortgages.
That suggests that there is still widespread interest in buying property as an investment, but mortgages taken out to purchase properties have declined since the introduction of the Stamp Duty Surcharge.
According to research from FJP Investments, most landlords (71%) believe the government has unfairly singled out buy-to-lets for taxation and regulation, and 44% apparently plan to offload their properties within the next two years.
Over the long term, the size of the UK’s privately rented property market has grown by more than 200% since 2000, but in recent years there has been a slight decline.
Looking at statistics from a real estate agent and property consultancy firm, we can see between 2017 and 2020 the number of houses for rent in England alone decreased by around a quarter of a million despite the total housing supply increasing by 695,00 homes.
They found that there was an increase in the number of existing property owners who were looking to sell their properties and a decrease in the number of new investors entering the housing market.
Are you willing to be hands-on with your investment property?
Buying buy-to-let properties require time and effort both in research and purchasing a rental unit but also in managing the rental afterward.
You need to be ready to go through the long purchasing process, do any necessary repairs, and make decisions about whether to buy furniture or not, but after that, there’s the choice between having an estate agency manage it for you or taking on the responsibility yourself.
Hiring an agent to handle rental properties means they’re less hands-on than managing them yourself. However, their fees will take away from your income.
With buy-to-let, you need to be an actively involved landlord rather than a passively invested landlord if you don’t take on management assistance.
You can use an agency to manage the house – but if anything goes wrong, the responsibility lies with you.
If you’re comfortable having a long-term relationship with your investment and are willing to put some effort into developing a good strategy then buy-to-let could be right for you — but it’s definitely not for everyone.
Investors need to be ready for a wide range of regulations.
You need to go through some regulatory hoops if you’re going to rent out a property.
For instance, landlords must obtain an Energy Performance Certificate (EPC) with a minimum rating of ‘E’, electrical safety inspections are needed at least once per five years, and gas safety inspections are necessary annually.
You must be aware of the risks involved with renting out a property and have a plan and insurance in place to cover such risks.
If you think you might want to sell your investment for any reason, then you should consider how long it could be before you get any return from selling it.
Feel like you’re ready to invest in property?
In conclusion, property investments offer investors cash flows, tax benefits, wealth building, competitive returns, and a way to protect themselves from rising prices caused by inflation. They can also lower portfolio risks by providing diversification.
However, as we stated above, there is a massive amount of risk and responsibility involved, and this can be daunting. So if you’re financially ready to dive into property investment but need a little helping hand with the rest then not to worry, that’s exactly what we do here at Cox & Co. Our expert property team can assist you at any point along your property investment journey, so no matter where you are, get in touch, we would love to hear from you and see how we can help make your property investment dream a reality!