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Top Reasons for Investing in Property

Grand Central Birmingham

According to the latest census, in the next two decades, the number of UK households is expected to reach 28 million. As one of the most crowded countries in Europe, the UK has a population density four times that of France and if it continues to rise, double that of Germany in the next 20 years.

As we all know, a rising population means housing demand will be at an all-time high, as populations boom and city-centre living become the standard. Government estimates suggest that to meet this demand, between 240,000 and 250,000 new properties will need to be built to stay on target with the number of required households being created in the UK.

Similarly, rental demand has skyrocketed over the last 18 years. While the private rented sector is growing in popularity, it still only accounts for around 20% of the total housing stock. All sounds like the perfect alignment doesn’t it? Rising demand and limited stock availability are huge factors but surprisingly, the reasons that investors choose property are even more varied. We recently surveyed 1,200 people and our research found that nearly 40% of our respondents have no investments planned for the future – meaning no real security heading into later life. Investment is a vital part of financial planning for your future and there are several reasons why property represents a solid asset class.

Whatever your circumstances for investing, we’ve shared some of the top reasons investors choose property below.

Security

Historically, the risk of investing in property is minimized by the length of time you spend investing, holding capital in property without the need to release grows as the average property market cycle grows.  Typically, the longer that you hold on to a property, the more time it can build capital growth. In terms of Buy-to-Let, it also offers more opportunities for building rental income, which can have a huge impact on a long-term strategy.

Equally, in the case of other investment assets such as stocks, with risk levels consistent and comparable, the investment length is important for returns. Beating the stock market, however, even with a wealth of knowledge, is a tricky game. Property factors are more open and obvious (regeneration, demand, amenities etc) while individual stocks are tough to pick and index-linked funds are open to the mercy of factors beyond your control – many of which can negatively affect your overall investment quickly. Property can be more flexible in allowing you to tailor and diversify your investments to suit you. It’s also a much more tangible asset that allows you to maximise several different income streams.

Finally, and interestingly, whilst housing supply is at an all-time low, demand has never been higher. However, whilst this trend of undersupply is UK wide, there are pockets which buck the trend upwards and of course, downwards. Identifying the growth areas and where demand is highest is critical. With the private rented sector forecast to make up 25% of the total market within the next decade, the physical asset of property can be a great choice for the more risk-averse investor if you pick the right location.

Flexibility in Financial Planning

Property investment is particularly good for creating a solid financial plan for the future. Whether it’s supplementing a pension, building up to an early retirement or creating a legacy for your children’s future, the dual streams of capital growth and rental yields create passive income and long-term capital.  Staying in control of the financial planning, however, can’t be overlooked, investors considering property should be aware and prepared for any void periods, maintenance costs and property management fees.

Getting these fundamental budgets correct also means being aware of and forward planning for any shortfalls in income (void periods), ensuring that suitable provision is made for the good and bad periods. All investors know that markets move up and down, so planning and considering any input you do need to make as an investment in your own pension pot, savings fund or however you’re using the property vehicle needs to be considered.

Being a property investor gives you control – allowing you to choose your own strategy, your own location and the demographics of tenant that you want to target. By working with property managers or lettings agents, you can allow them to handle the administration while you plan your next investment.

Accessible Asset Class

Residential property is arguably the most accessible investment class out there.

We all understand bricks and mortar, rental and for those of us willing to admit their age, the time when an apartment sold for 60k or a three-bed in a nice suburb for £120k. We’ll also recognise the cyclical growth of the property market and all know friends that made a fortune in the growth periods. While it does require funding for deposits – typically 20 – 25% in BTL markets – and a clear strategy, there’s no need for years of training or experience such as a complex understanding of stock markets, mutual funds, crypto-trends or a degree in macroeconomics.

It’s always wise to do your own research and seek professional advice whatever your chosen investment vehicle may be, however, the key terminology, fundamentals and components to property as an accessible asset class don’t require the same level of market knowledge and you certainly don’t need to be Warren Buffet to create and understand a property investment.

Wealth Generation

Back in Spring 2018, SevenCapital conducted a UK wide survey to understand the nations’ shifting investment trends, the research showed that “making money” was the second most popular reason for investing in property. Sitting at 32%, there’s no doubt that wealth generation continues to be at the forefront of investor’s minds, whether it’s for securing a comfortable retirement, building a second stream of income, diversifying a portfolio or creating additional financial security.

All investments carry both risks and benefits as well as different types of return methods. Index funds, for example, carry a basket of mixed stocks and allow investors to effectively bet on market growth over the long term without devoting a lot of time to your portfolio, reinvesting returns into the same fund to achieve compound growth. Whilst the returns are market-linked and can be fairly stable (both up and down), most index funds won’t pay dividends in cash – meaning they’re also not generating the passive income that most investors will be looking for.

There are several investment vehicles that have a lower entry point than property investment but unlike bonds, stocks, crypto or funds, investors in property are able to leverage lending streams, i.e. mortgages, to fund wealth generation. Widely understood, simple and effective, property enables investors to leverage additional funding to create both rental income and capital growth over time. For those who want to invest in property but avoid the wait to achieve capital growth, choosing off-plan property can be appealing for the capital growth it can generate during the build period, on top of the discounts usually provided by developers. Away from off-plan, ready to rent Buy-to-Let properties provide the benefit of rental income as soon as the property is let and providing the location, tenant demand and growth potential is there, can be ideal for long-term investment strategies.

In terms of building a property portfolio, it’s no surprise that many investors choose to use their rental income to pay off mortgages and any leveraged funds – creating a net zero or net positive cash position each month whilst building the broader capital growth. It is important that investors across the property landscape make suitable provision for any void periods, not quite so critical where no lending is in place but for those that choose to leverage mortgage funds, any void periods or unforeseen costs (maintenance etc) can mean a shortfall in net cash position and potentially additional contributions to meet borrowing repayments.

Most investors, especially those that have been in the property market for any period of time, will recognise this and make use of any net positive cash position to accrue funds accordingly – balancing the higher yield benefits that property affords with a balanced, pragmatic approach.

While these are just a few examples of why people choose property investment, they’re generally very common and it’s easy to understand why. As a long-term secure and flexible investment, property can be an excellent choice for first-time and seasoned investors alike.

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