Investment Property

Investing in Residential Property: Pros and Cons

Investment in property can offer stability, simplicity, and excellent returns. However, that doesn’t mean that just because you have capital to invest you should automatically invest it in property. There are some serious considerations to make before putting one’s life savings into a property venture that could prove to be unsuccessful.

One of the big advantages of property investment is that it offers returns that are hard to find in other investments. Not only that, but a property investor purchasing a ‘buy-to-let’ property can borrow money in order to buy the property, and repay the loan with the income he or she receives in rent from tenants. In addition, when buying such property, there’s usually no emotional involvement as the investor knows (or should know) that their sole aim is to see a return on their investment.

Most people wanting to invest in the residential market purchase a buy-to-let property. This property is then let to tenants who provide the investor with a rental income. This buy-to-let investment option can be taken out by an individual or a consortium of individuals comprising what is known as a property investment club. As well as the money the investor receives in rent, he or she also benefits from any increase in the house price. Furthermore, the investor has a property at his or her disposal in the future: the investor may want to live in the property at a later date or to pass it on to his or her child/grandchild. One of the advantages of a buy-to-let purchase is that interest payments on buy-to-let mortgages are subject to tax relief against the income. Lenders also have specific mortgages for this type of property investment that are based on expected rental income so personal income need not have to play a part: they are therefore available to the retired and self-employed borrower as they are to other borrowers.

The disadvantage to this type of investment, however, is that there is no guarantee that the property will be occupied 100 percent of the time. During any ‘lull’ periods you will have to make the mortgage repayments from your own resources. And costs such as service charges and Council Tax will still have to be paid when the property is vacant. You will also be responsible for the maintenance of the property and any repairs – even if you instruct an agent to manage the let for you. Anyone considering a buy-to-let will need to consider all the purchase costs involved, from the purchase price of the property, including conveyancing fees and Stamp Duty Land Tax, to management agents’ fees.

Further disadvantages are that, depending on the state of the buy-to-let property you purchase, you might have to carry out extensive repairs. There will be no income in the form of rent while the property is uninhabitable and the refurbishment will cost money. When fitting out a buy-to-let property, one of the hurdles investors face is their inability to remain emotionally detached from the property. Remember that the property isn’t where you are going to live – at least not for the foreseeable future. While you might be tempted to spend huge sums on top-of-the-range fixtures and fittings, remember that no tenant will treat the property as well as you will as their interest in it isn’t as great. Keep all fixtures and fittings appropriate. Above all, ensure that the property meets the rental market requirements.

In addition, a buy-to-let investment is not a short-term investment. The property will probably need to be held for several years to yield a return to cover your initial costs. Another factor to consider is that an investor choosing residential property runs the risk of placing all his eggs in one basket. He or she will already have a property investment in the shape of their main residence. Taking on an additional property means that all the investor’s assets are subject to the vagaries of the housing market.

Investing in commercial property has some advantages over residential property investment. Unlike tenants of residential properties, commercial property tenants typically sign leases for longer tenancy periods and are usually liable for any repairs. Commercial property return also tends to be linked to income rather than the increase in house prices as is the case with residential property investment. On the downside though, if you’re a private investor and you buy your investment property at auction (where many private investors buy commercial properties), you’ll need to have arranged funding early on, as once you’re successful in bidding for a property, payment usually has to be made within 28 days. The investor will also need to do some research to make sure that the business that comes with the lease on the property is stable and isn’t liable to fold should the economy take a downturn at any point in the future.

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