Should I Invest in Property: Drawbacks to Direct Property Investment

Invest in Property

Direct Residential Property Investment: Key Considerations to Make

Until the development of the stock markets, property was virtually the only asset-backed investment that was possible. Even today with the range of asset-based investments readily available, Individuals are still keen to invest in property. Property tends to be a fundamental of portfolios with homes accounting for a large proportion of wealth. Others owning a second residence which is rented out.

With the government now looking unfavourably on Buy-to-Let by introducing additional taxes, this article will take a closer look at the drawbacks to direct residential property investment.

Liquidity

The first drawback of investing directly in residential property is the lack of liquidity associated with property as an investment. With any market, there must be a buyer and seller and this is no different if you invest in property. Many other investments that we are familiar with such as shares, Unit Trusts, OEICs and currencies all share this feature too. However in these markets, buyers are always instantly available.

For property investments, buyers may not always be readily available. Factors such as economic conditions, the popularity of a certain neighbourhood and price disagreements all factor into the buying process. When coupled with further factors such as property chains and the efficiency of solicitors/estate agents. It is clear to see why a buyer is not always readily available.

The Advisory’s ‘Time to Sell’ benchmark study of 2019 concluded that the average time to sell a house from the first day of marketing to legal competition was 129 days. If the capital locked up in a property is required for an emergency or for other requirements in your life there would be an extended hold-up period for accessing this when compared to other investments as noted previously.

Fees Associated with the Purchase of Property

As briefly touched upon in the introduction to this article, the residential property market has witnessed significant change in recent years with the 3% stamp duty land tax surcharge on second and buy-to-let properties in April 2016. This means that for the purchase of a second property of £300,000, the extra 3% stamp duty land tax would result in an additional £9,000 tax bill.

Whether this government policy was aimed to increase government revenue or to act as a deterrence (or a mix of both), the fact remains that to directly invest in property has costly initial charges. Added onto conventional stamp-duty land tax, legal, valuation and broker fees among others, the entry fees do really stack up. When compared to other investments, many collective investment Unit Trusts and OEICs do not charge an entry or exit fee.

Maintenance of residential properties also tend to be the responsibility of landlords and the relatively high level of ongoing expenses that are involved with residential properties. Such as managing agents, maintenance and building repairs will all eat into the real yield generated by the rent from the property.

Whilst other investments will too hold ongoing fees such as management charges to fund managers, platform charges and adviser charges. These charges are a set percentage each month and are therefore much more predictable for financial planning. Building repairs for residential property can come out of the blue and can cost any amount making it much harder to budget for.

Void Periods

The final consideration that this article will touch upon is the potential for void periods in the collection of rent, which acts as income for the investor. This void period can arise from a gap in tenancy where no new tenants can be found, or from existing tenants failing to pay their rent which can lead to legal fees if action needs to be taken to seek possession of the property.

If the rent generated by the residential property investment is relied upon for the investor’s monthly outgoings, such as the mortgage for the property, any void periods can be particularly detrimental. 

The Alternative to Direct Residential Property Investment

Property continues to be an essential tool in most people’s portfolio, primarily as it provides a living space as a main residence. Investment in property outside of one’s main residence is also used in many portfolios. This could be for reasons such as protection against inflation, prospects for long-term capital growth and finally for diversification purposes.

However, for the reasons mentioned above, direct residential property investment may not actually be feasible. Therefore, a way of exposing a portfolio to property without the mentioned drawbacks is through collective investment schemes. This leads to either invest a proportion of their funds into property-based investments or otherwise specialise in property investments.

The benefits of this approach are that a dedicated, skilled and experienced fund manager will be able to pool the funds of multiple investors together to invest in various types of property. This will enable individuals to gain exposure to properties such as commercial offices and industrial factories within their portfolios. This tends to provide a stable rate of return with low levels of volatility.

Typically, these types of investments would only be available for the richest in society due to the associated high purchase costs. As commercial property tends to follow a cyclical pattern which is often the opposite direction to equities, it lends to fantastic diversification benefits.

If you would like to discuss property investment with an Adviser, please contact The Harvest Partnership Ltd via our Contact Us page.