Is investing in property literally as safe as houses?
We explain the risks involved in property investment, how to choose the right property, and provide an overview of the UK’s best and worst performing areas.
With the housing market mostly booming in recent times and the number of people privately renting properties increasing, investing in property might seem the obvious way to make big profits. However, it pays to think carefully about whether it’s right investment path for you.
Buy to let
The attraction of buy to let – the purchase of a property to rent out to others – has become ever-more popular in recent times. There are clear reasons why:
- Owning an asset likely to appreciate steadily over a long period
- Ongoing income from rent paid by the tenant
- The option to generate a likely large profit if the property is sold
What are the risks?
The market – house prices and the rental market can go up as well as down. Over time, property is proven to appreciate but basing figures on, say, a time where properties are rising sharply may be a high risk strategy. What happens if a particular house price boom doesn’t last?
Could the demand for the type of property amongst its potential tenants drop? It’s important to factor possible empty periods where the property may have no paying tenants.
Financial – if a mortgage is being used to fund or part fund the property purchase, then changes to interest rates in particular have to be taken into account. Many financial forecasters expect interest rates to rise sooner or later from the historically low levels experienced in recent years. It would be negligent to base affordability on an assumption that low interest rates will prevail in the long term.
Location – the desirability of property is reliant on location, so this is a huge consideration. It’s not just for the short term, either. Will the location make the property appeal over the longer term? Indeed, will the location enhance the value of the property in the long run? For example, in north Oxford properties are predicted to rise sharply as vastly upgraded rail links will make the area a faster commute to London, which will of course lead to more interest in the area.
How to combat the risks
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The market – it’s important to research areas properly. Many buy near where they live, but for those looking nationwide for the best areas to invest, research into geographical locations is time well spent. For example, some areas of Cornwall are considered to be priced low at present but will rise.
In Richmond, North Yorkshire, the army garrison at Catterick is being expanded with an increase in population of some 25,000 estimated by 2020, so it follows housing demand will increase so property prices and possible rental demand will, too.
Manchester has the overall ingredients for good property investment. Being a large city many people work there, its population is increasing year on year, and there are large investments in its infrastructure in the pipeline.
This feature gives more information on twenty specific UK areas considered good investments outside London.
Market research is a valuable activity when it comes to determining where the best place to buy will be. The ‘sweet spot’ is an area destined for increased popularity that hasn’t experienced commensurate property price increases yet.
Financial – it’s very important to consider all the variables as far as is possible and consider the ‘worst case scenario.’ For example, what if the property is empty for a certain period and the interest rate is significantly higher than the one applying when the mortgage was taken out? Is the property still affordable?
Other expenses have to be considered. There will be costs if using the services of a lettings agent, and it makes sense to allocate a fund to meet future larger bills such as replacing a boiler or re-financing with a new mortgage lender.
Location – partially covered by conducting some market research as discussed above. Knowing the best locations to buy in is vital, as is matching them with likely tenant demand so the property spends most of the time let rather than standing empty.
It could be tempting to buy in a low purchase price area, but will there be enough tenants to keep the property occupied? What is the potential, if any, for improvements in the area and thus increased rental demand and an increase in the property price?
Is the area under consideration subject to some regeneration that will bring people in and, more importantly, sustain demand for many years? For example, Greenwich has seen huge growths in property prices. A key factor for this is its proximity to the regenerated areas of London after the 2012 Olympics. This made it the highest property price growth area in the UK, according to research conducted by the Halifax featured here in December 2014.
UK property winners and losers
In the above survey, London was the hands down winner in property price rises, with areas of the capital filling nine of the top ten places. Areas such as Ealing, Tower Hamlets and Hackney are very much on the rise. Crawley in West Sussex was the only place outside the London district to make the top ten.
On the other hand, the ten worst performing areas were all located in the Midlands, South Wales and the North. Areas such as Rochdale, Nuneaton, Newport, St Helens and – somewhat surprisingly perhaps – Durham all had average property price falls.
Still as safe as houses?
Property is still a solid investment but it pays to consider what is affordable and take into account possible variables. Researching the market carefully in terms of both property prices and the rental market in the area will pay dividends.
It’s possibly best not to rely on property as a short term investment. While prices can rise and fall and the rental market can vary, over a longer period property has proven itself to be a viable long term investment. It generally rewards those prepared for the longer haul.
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