Your 5 minute run-down to property investing
Here’s a quick guide for beginners who are thinking about the pros and cons of investing in property, but would also like a bit more information on investment alternatives. So here we go…
Why invest in property?
With property, there’s two main ways to make a return. You can rent (earn an income by letting out property to tenants), or you can sell for a profit (by buying a property and later selling it at a higher price).
Risks of property investing
Buy-to-let has come under the cosh recently from a tax crackdown but many still see property as an attractive investment at a time of low-interest rates and volatile stock markets. If you’re willing to wait, you can ride out the losses in a slow housing market and earn profits again when times are better. But beware that if you’re over-invested in property e.g. if most of your money is tied up in a buy-to-let, then you might end up in trouble if the housing market slows. To avoid this, you should diversify your portfolio by holding different kinds of investments.
Buying property directly – what to watch out for
There are several risks when you buy property directly.
- You can’t get your money out quickly – unlike shares or bonds, it takes a long time to sell property.
- It’s a big commitment – when you buy a property, you’re putting a lot of eggs in one basket.
- There are buying and selling costs – with estate agent and surveyor fees, stamp duty, land tax, solicitors’ and conveyancing fees to consider.
- It’s hard work – doing maintenance work and managing property takes time and money.
If you use a mortgage or a loan to buy property, there are additional risks:
- There’s no guarantee you’ll earn enough rent to cover loan repayments.
- The cost of the mortgage might rise.
- If you don’t keep up with repayments, the bank or building society can take back the property.
Indirect property investing through a fund
Even if you don’t want to buy a property yourself, you can get these potential benefits indirectly by investing in a property fund that invests directly in property. With a property fund, a professional manager collects money from investors, then invests the money directly in property or in property shares. Fund managers charge a fee for this service, which will affect your earnings.
Here are some examples of property funds:
- Property unit trusts
- Property investment trusts
- Real estate investment trusts (REITs)
- Shares in listed property companies
You can read more about my preference for investing in REITs via this article link here.
Property crowd funding
A new form of property investing is also becoming increasingly popular which takes advantage of the power of crowdfunding. These crowd funded organisations (an example being propertymoose.com which is based in the UK), allow private investors to invest small amounts into a mutually purchased property. The rental return on the property is then divided out and paid back to each investor in proportion to the amount they invested (minus fees). Whilst this form of property ownership is becoming increasingly popular it’s still early days and caution should be advised when considering putting money into these schemes. As always, do your own due diligence beforehand.
Before investing in property make sure you follow these tips
- Before you make any decision about investing in property you should find out as much as you can.
- You can research the potential pros and cons on your own, or take advice.
- You’ll also want to look at whether a different type of investment might better suit your goals.
I’m intending to update this guide frequently so if you’ve got any opinions you’d like to see added please mention them in the comments section below.