Property

Property investment is often different from other investment in one crucial respect - people tend to be prepared to borrow in order to finance the investment. This brings additional risk, as a fall in property values can result in losses being magnified, and sometimes in the debt ending up larger than the property value.

This effect is called gearing, and acts to magnify both gains and losses. For examples see gearing.

Residential property

If you own your own home, remember that you already have a considerable investment in the property market. Any gain that you make when you sell a property that is your main residence will normally be free of Capital Gains Tax, so from an investment perspective this is very tax efficient.

Remember, though, that your main residence is your home and you are unlikely to benefit from any gain that you have made until you trade down to a cheaper property or you raise capital or income from it. This is proving to be an option that many retired people are now considering, in order to release capital to help them lead a more comfortable lifestyle.

Commercial property

Commercial property is a huge market. Every high street is filled with this type of property, and there are industrial estates throughout the country, both new and old.

Businesses need premises, and there will always be a demand for commercial property. Investment in commercial property brings some rental income and the prospect of increasing values down the years.

Investment in individual commercial properties is difficult for the small investor, and the involvement of surveyors, letting agents, and solicitors is crucial.

The smaller investor can gain exposure to commercial property through pooled funds. These spread investment across numerous properties, reducing risks. Pooled funds sometimes invest directly in property and sometimes in the shares of property companies. There are significant differences between these approaches. They are managed by professional investment fund managers.

Buy to let

Buying a property to rent out has often been a very popular option. You should remember that the money that you use to buy the property is tied up in the property, so you need to try to make rental profits in excess of the amount that you might have earned by investing this money in any other way. Of course, you also hope that the property will increase in value over the medium to long-term.

There are a number of risks that you should be particularly aware of:

Bad tenants. The cost of fixing damage can be difficult to recover from this type of tenant.

Difficulty in evicting non-payers. Although modern tenancy agreements protect your rights, it can take time to remove a tenant who does not pay. It can also be difficult to recover unpaid rent.

Void (vacant) periods. While your property is empty you are earning nothing, yet you are still liable for the council tax and water rates, together with payments on any loan that you took when you bought the property, and maintenance.

Letting agents costs. Unless you wish to spend a great deal of time managing the property yourself, you would be well advised to employ a letting agent. This reduces your eventual profit.

Demand for rented property. This varies, and with an increasing number of buy to let properties available for rent, prospective tenants now have a wider choice. This may make achieving a reasonable rental income difficult.

Short term fluctuation in values. Especially if you borrow money to buy a property, a combination of the above problems could result in you deciding that you need to sell the property. Property values do not always increase in the short term, and it is possible that you could get back less than the amount you borrowed.

Lack of liquidity. When values are depressed it can be difficult to find a buyer at an acceptable price. The need to sell quickly may lead to offering a 'bargain' sale price, magnifying losses. Additionally, property transactions are notorious for taking long periods to finalise.

These are just some of the issues that you need to consider before buying a property to let out. The list is not intended to be comprehensive, but is intended merely to be an illustration of the fact that buying a property to let out is not necessarily the crock of gold that many people believe it to be.

For further information, and help in deciding whether property investment is right for you, please contact us.

Remember that property prices sometimes fall as well as rise and there is no guarantee that you will profit from property investment.