Why Invest in Property
Investing in ‘bricks and mortar’ is now a popular investment habit in the whole world. At parties, social gatherings and the like, the most common subject of discussion is often the property market.
If you look all around you, you will see that people are beginning to appreciate the benefits of property investments. In fact, in late 2014, Enfield Council broke with tradition and went ahead to form a company with a view to investing in properties. In early 2015, Westminster Council began purchasing properties outside London because of shortage of properties. The limited housing stock caused by tenants buying up council flats is a contributory factor.
What then are the benefits of investing in properties? Why invest in properties?
(a) Wealth Creation
Most people invest in real estate to generate wealth. There are now almost two million buy-to-let landlords owning £1 trillion of property.
In early 2015, the English Housing Survey (which was commissioned by the Bank of England) showed that the proportion of households in England who owned their homes outright (without any mortgage) outstrip the proportion of households who own their homes with a mortgage. There were 7.4 million outright owners versus 6.9 million who own homes with a mortgage.
According to Lloyds TSB Private Banking, in 2012 housing wealth (i.e. the value of housing less outstanding mortgages) increased by £1 trillion over the last 10 years. Housing wealth has grown faster than incomes. The value of the UK housing is now estimated at about £5.75 trillion. The housing stock in London is worth £1.5 trillion. The total value of housing across North West, North East and Yorkshire & the Humber rose by £42 billion over a decade. From these, it is understandable why we are obsessed with investing in bricks and mortar.
Apart from wealth creation generated from capital appreciation, investors would also benefit from “cash flow” from rental income.
The rate of increase of house prices in the UK has prevented first-time buyers from being able to access the property ladder. The English Housing Survey showed that people aged between 25 and 34 were now more likely to be renting privately than buying. As a result, the overall average rents are rising in the UK. For instance, in 2015 there was a 7% increase in rent in Manchester. In England, buy-to-let Landlords banked almost 4bn a month in rental income in the first quarter of 2015.
Another reason to invest in real estate is to create a pension plan so that when you retire, you have a guaranteed stream of regular income in the form of rents received from your property.
Prior to April 2015, the pension system in the UK had been ineffective. The large savings pot had become worth less and less. To compound matters, if you needed to draw down on your pension, tax was payable. The ineffectiveness of the whole system led the Conservative Government to change the law. Now if you are over 55 years old, you are permitted to draw down some or all your pension and spend it as you see fit.
Some people buy annuity instead of property. An annuity is a kind of insurance product that ensures you receive a regular income for the rest of your life. It turns savings into regular monthly income.
I normally stay away from annuity because when you die your fund may go to the annuity provider. Some providers may offer guarantees that your next of kin would receive a lump sum, but after deduction of fees, etc they may not get anything like the money initially invested.
For this reason, I prefer investing in property. This will give you more autonomy and control over the management of your assets during your lifetime. You can also easily transfer its true nature in your Will.
Property ownership works exactly like an annuity, only better. If you own it outright, you would have paid the initial purchase price at the outset. If it is mortgaged, you would pay your monthly premium to the mortgage company until it is fully paid. Your property (which is like a “policy”) would now earn you cash value. I see properties as long-term annuities.
(c.) Forced Saving Plan
One advantage of property investment is that after you have invested in it, your cash is tied up in this investment such that it prevents you from spending it recklessly. I know of some of my friends who have inadvertently become rich because once their money was stuck in the investment they could not quickly release it. So they hung on until the property increased in value.
Since properties that are rented gives return, investing in property is like putting your money in a savings account, only better. If you save £15,000 at the bank, the average interest you may get is 2% per annum. If you invest the same amount in a property in, say, Manchester as a deposit on a mortgage of £70,000. Your rent is likely to be £500 per month. Since interest rate is low, your mortgage should be no more than £350 per month. This would give you £150 per month, which is more than you would get in a savings account.
(d) Tax Shelter
Some economists have argued that investing in rental property creates a tax shield for income generated from the property. In England and Wales, the tax law allows buy-to-let investors certain tax relief, which effectively reduces their tax bill. These tax relief are known as “allowable expenses”. There are numerous “allowable expenses”. For instance, the tax law allows a buy-to-let investor to deduct from the rental income, amongst others, the cost of maintenance and repairs done to the investment property (but not for improvements) before paying tax on the net income.
The tax law also allows for tax relief on mortgage interest paid by the buy-to-let investor. This tax break allows landlords to deduct mortgage interest from their profits, thereby reducing their tax bill.
If the investment property is a furnished residential letting, the buy-to-let investor can also claim 10% of the net rent as ‘wear and tear allowance’.
Thus, property investment not only increases your asset worth, it also enables you to reduce your tax liability. Isn’t that great!
There are a number of people who invest in property with a view to leaving a suitable asset to their children when they die. This is sometimes referred to as inheritance.