Understanding The Pros And Cons When Investing In Property

by Adam on August 16, 2017

 

house questionInvesting in property is something many people are interested in, and for a good reason.

Making the right investment can net you a small fortune. However, there are risks involved. You need to ensure the property is up to scratch for starters to ensure you aren’t investing in a potential money pit. Then you need to consider your personal circumstances. Do you have the finances to invest in, and develop a piece of property? You then need to work out what you want to do with the property. Are you looking to rent to others, such as buy to let student properties, or are you looking to invest for personal use? Planning is clearly required.

To help you, we have compiled a list of pros and cons why you might choose to invest in property.

Beginning with the pros.

Positive ISASafer than investing in shares

Compared to investing in stocks and shares, investing in property is less of a gamble. Provided you have bought a building worth living in; you can generate a sizeable income. You will need to commit to research online, and if you are buying to rent, then you should choose the location carefully. You can buy something cheaply, and fix it up to net yourself a profit if you choose to sell it later, or rent it to others.

Banks favour residential investors

As property is a safe investment, there should be little trouble raising the capital, provided you have a good credit record. Banks will offer you a lower interest rate when investing in residential property, but you should still shop around for the best deals.

The house is yours

Whether you choose to live in the house or not, it’s yours! You can do what you want with the place, and in many ways you are investing in the future. You can buy and develop a property for you to move into in the future, and you can leave it to family in your will. When you rent, you can set the rates, and can easily control the income you generate.

investingProperty prices are growing

For the moment at least, but you do need to keep an eye on the property market. In the meantime, you could feasibly buy something worth around £200,000 and see the value rise at the current rate of around 5 or 6% each year. The work you do on the property can also raise the value considerably.

Immediate cash flow

Should you choose to buy to rent, you can guarantee an almost immediate cash flow. There is a high demand for rental property in the UK, so provided the property is well maintained, you will have a line of people waiting to move in. Of course, you will also need to be a good landlord, so while you can make a profit in line with inflation in the rental market, you don’t want to fleece your tenants out of their money. Ultimately, you are creating a positive cash flow, giving you the means to pay off your mortgage, and other expenses, through the rent you charge on the property.

Leverage your investment

Leveraging your investment is easy. You put down a deposit, and the bank will give you the rest of the money for the property. You can maximise the return on your investment when the house appreciates in value. For more about leveraging, read the useful advice here.

Negative ISAAnd now for the cons.

Not a liquid investment

It can take a long time for a property to sell, so if you need to access the money from the sale quickly, you might be out of luck.

Hidden problems

You may have done your homework and had the building inspected before buying, but there will always be a hidden problem down the line. Disaster might strike due to the weather, and you will need to pay for damages. You will be liable to pay for unexpected bills on the property before tenants move in. You will also need to chase up rent payments if your tenants are not the most reliable people on the block. You need to account for the possible risks involved and find ways to protect your asset.

Entry level costs

It can cost you a small fortune when you are trying to make a step-up on the property ladder. Property prices are continually rising, which is fine when you want to sell, but not so easy when you are trying to buy something. If you don’t have the money behind you, for your personal life as well as your investment, you are going to struggle.

Automate so you can sleep and get the job doneProblems with tenants

Buying property is a huge investment, and if you are relying on the income from your tenants, there are many risks involved. For starters, they may cause damage to your property which will need to be paid for. They may be late with their rental payments or may move out without notice, leaving you with an unexpected vacancy. You will struggle to make your own repayments on the mortgage, so you do need to have extra money set aside to account for a shortfall. Then of course, there is the emotional stress that bad tenants can cause. You want to rent to decent people, so make sure you run background checks, such as collecting references before letting anybody move in.

Ongoing costs

For as long as the property is yours, you are liable for ongoing and additional costs. The list could be endless, and these might include council rates, renovations, maintenance, insurance costs and more. Again, you need to prepare for this eventuality before deciding to invest and remember that some of these costs will come when you least expect them.

Bottom line

Those are just a few of the pros and cons you need to be aware of when it comes to investing in property, so hopefully, we have given you a little insight into the reality of the situation. Do your research, speak to the experts, and take stock of your life. You can make tidy income from the investment, but it pays to know the risks involved.

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