Is property a good investment?
In this week’s blog, we tell a few stories about our own and other people’s experiences of buying and renting property to illustrate some of the advantages and disadvantages of each.
“I was in my early thirties when I bought my first flat in Leeds. I needed somewhere to live, so I bought an apartment that I liked. It was purely an emotional decision. Little did I realise that three years later, I would leave Leeds. Rather than selling the flat, I decided to rent it out. The rent has provided me with some income over and above my costs, but the flat has barely grown in value over the twenty years I have owned it - only 0.1% per annum.
A few years ago, I considered selling it, but I have decided that it is worth keeping for the income, especially as it would cost me a few thousand pounds to sell it.”
“Also in my early thirties, having recently got divorced, I bought two flats in Leeds with buy-to-let loans. The flats were part of a beautiful mill conversion, and although they were small, they felt spacious because of the high ceilings. They were fairly close to the city centre and the motorway, so I thought they would rent well. In retrospect, the decision to buy was mainly emotional – these were flats that I would like to live in myself. If I had done more research into the rental market, I could have saved myself a lot of money and trouble.
The flats were hard to rent, and I had trouble getting the letting agent to release the rental income to me. On a couple of occasions, I even camped out in their offices, refusing to leave until they had paid me.
When one of my tenants left, I had a call from the police telling me that they needed access to the flat because they thought that the tenant had harboured a murderer.
A few days later, the police confirmed that they had found traces of blood from the murder victim in the flat, as well as evidence that it had been used by drug dealers. Although the police left the apartment in a reasonably good state, I still had to clean up the remains of the fingerprint dust before I could rent it out again.
After a couple of years, I decided to cut my losses and sold up.
My foray into buy-to-let properties was not a great success!”
In contrast to Julia and Keren, Harriett has had a lot of success with renting out properties. Her journey started accidentally. She had tried to sell her family home, but couldn’t find a buyer. Instead, she decided to rent it out. She found model tenants who stayed for 11 years, and she caught the letting bug.
With her surplus savings and every bonus she gets, she pays off more of her mortgage and uses the equity to buy another property for rental. Eleven years on, she owns seven rental properties.
“I find the process of renovating properties really rewarding. Our houses have all increased in value significantly, and we have not had any difficulties renting them out. The only downside is the occasional expense and effort when one of the houses needs some work doing on it.”
On average, Harriett spends around three days a week managing the houses, so owning a portfolio of properties can be quite time-consuming.
Jonathan has always rented his homes. This has allowed him the flexibility to move far more freely than he could if he had owned them. It takes time and costs a lot of money to buy and sell properties, whereas if you rent, you can usually move at the end of any rental period with no financial penalties.
“I hate the thought of having to do DIY or distracting myself with property maintenance issues. Renting means that someone else can take all of that responsibility, and I can focus on what I enjoy doing.”
The downside is that Jonathan will have to continue paying rent once he has retired – a time when most homeowners will have lower outgoings.
So, is property a good investment or not?
As our stories illustrate, property can be a good investment, but there are some downsides:
You cannot assume that if you buy property, it will appreciate in value.
If you buy to let, you cannot assume that you will be able to find tenants.
Property is illiquid, which means that you can’t turn it into cash quickly. Even if you find a buyer quickly, it takes weeks (usually months) for the sale to complete.
It is expensive to buy and sell properties. At the very least, there are estate agent’s fees, legal bills, and, depending on where you live, land taxes to consider.
There are hidden costs associated with property ownership, for example, maintenance and insurance, which will still need to be covered, even if you don’t have a mortgage.
As an alternative, renting could seem attractive as someone else is responsible for looking after the building and it is easier to move. But renting also has downsides:
Monthly rent can be higher than monthly mortgage payments for the same property.
Depending on protections in the country you live in, rents can rise and tenants can be forced to move home if, for example, the owner decides to sell.
If you don’t own a property at retirement, you will need to continue to pay rent out of your pension.
Keren’s advice is to consider the lifestyle you want, your financial goals and which option is likely to work best for you. She usually recommends that a proportion of your investments are in property (bricks and mortar, not property funds) so that you are spreading your risk. Owning property can also increase your financial wellbeing, so it’s well worth considering as part of your investment strategy.
Do you have a property story to share for the benefit of others? If so, please email Julia at firstname.lastname@example.org or Keren at email@example.com. We are more than happy to keep your personal details confidential – we usually change the names in our stories, as well as any other details that might identify you, while retaining all the key messages.
This blog is part of a series being written by Keren-Jo Thomas and Julia Goodfellow-Smith, with Keren providing the technical input. If you are finding these blogs useful, please subscribe above and give us a shout-out on social media so that your friends can find us too.