If you’re fed up with paltry savings rates and looking for a more attractive home for your money, property is an obvious place to look. But is it the right investment for you?
We are obsessed with property. Whether it’s discussing house prices, renovating our homes or buying up flats to rent, bricks and mortar play a huge role in our lives.
TV schedules are packed with programmes showcasing the benefits of transforming your home or taking steps towards becoming a buy-to-let entrepreneur.
It’s also a topic on which everyone has an opinion. In fact, there are so many myths it’s virtually impossible for potential investors to sort fact from fiction.
We consulted the financial gurus to investigate the most popular property myths to help you decide whether it’s the right type of investment for you.
House prices will always rise
While many property investors who started out in the 90s will have made a fortune from the house price boom, the market looks decidedly different these days.
Indeed, they are not immune from downturns. Between September 2007 and March 2009, the average price slumped 18.7% from £190,032 to £154,452.
That represents a staggering fall of £35,580, so whether property values rise depends on when you first buy.
And as our exclusive research highlighted, prices are currently looking far less buoyant than in recent years.
Property is a low-risk investment
Kate Faulkner, founder of information portal Designs on Property, says the idea of one property market moving up or down is outdated.
“We’re seeing huge numbers of micro markets in which property prices within a mile of each other can be rising, falling or staying the same,” she says.
It depends on the area and the demand for property. Some places will see huge competition between buyers while others won’t attract attention.
“Average prices are no use,” she says.
“The only person that can tell you what’s happening is a good local estate agent.”
Property should always be your first investment
For anyone under the age of 35, the expectation is to save your money until you’ve bought your first house. However, with interest rates so low and wages stagnating, the average age of first home buyers has risen to 30 in the UK.
Click & Invest Investment Manager Alex Neilson suggests that leaving your deposit savings in a bank for over five years, may be a good low-risk option, but it’s not always the best way to grow your money.
“If you’re a young professional looking to buy a property within the next three to five years or more, then investing might be your best option,” says Alex.
“Saving is always more suited for short-term goals but these days, most people are building up their deposit over a number of years, so for these kinds of long-term commitments, investing offers the potential for greater returns, “ Alex suggests.
You can’t make money from property anymore
House prices may not be soaring as they were a few years ago but that doesn’t mean to say it’s a no-go area, says Kate Faulkner.
“The nice thing about property is that however bad it is you can always make money – you just need to be savvier than before and get good tax advice.”
If your intention is to sell your property portfolio to fund your later life then make sure you prepare well in advance.
“Many people want to liquidate their portfolios but leave it too late to benefit from tax mitigation, such as various allowances,” she adds.
What’s more, Rachel Springall, spokesperson for Moneyfacts, points out that many lenders have cut buy-to-let mortgage rates in the search for new business.
“The average five-year fixed rate on buy-to-let has fallen from 3.58% to 3.04% in just 12 months for those with a 40% deposit,” she adds.
What’s more, data shows that the number of mortgages on offer has hit its highest level since before the financial crash a decade ago.
Buy-to-let is the best income source
“This has been a myth for years,” says Kate Faulkner.
“A good financial adviser will make you a 4% return today and you’d be lucky to make that return out of buy-to-let unless you had a house of multiple occupation and were renting out rooms.”
You need to factor in the costs associated with property ownership, including general maintenance, as well as how to cover the mortgage if the property is empty.
Improving a property increases its value
This isn’t necessarily the case as it will depend on the property, according to Melfyn Williams, director of Williams & Goodwin estate agents and the former chairman of the National Association of Valuers & Auctioneers.
“There’s only so much you can spend on a house,” he says.
“Kitchens and bathrooms do help sell a house but there’s no point putting a brand new £30,000 kitchen into your average three-bedroom semi-detached home.”
In the same way as improving the inside, increasing the size of properties in the hope it will increase the value is no longer guaranteed.
There will be a ceiling to how much extra it makes, particularly if you end up with the best house on an average street.
Property is a great diversifier
It’s sensible to have a broad spread of assets – such as equities, bonds and property exposure – so you aren’t badly hit if one area hits a problem.
However, you need to keep a close eye on where you are invested.
It all depends on your overall investment portfolio, according to Darius McDermott, managing director of Chelsea Financial Services.
“Most people’s main investment is already their home so if they’re buying more property they will have a lot of exposure to one asset class,” he warns.
Property is better than a pension
If you are involved at the right time, your property can soar in value and make you a lot of money.
However, if you only end up buying a property in your thirties, you’re losing the chance to start benefitting from compound interest.
Alex Neilson, investment manager at Investec Click & Invest, explains compound interest as the process whereby the returns on your investment snowball, increasing in value as you gain interest on your investment over time. “
“Time is the key factor here. If you want to really benefit from compound interest it’s best to start as early as possible, so if you’re buying property increasingly later in life, you are effectively losing valuable time to gain interest.”
Another factor is where you will live if your home is your pension, Darius McDermott points out.
“You’ll have to either sell or downsize.
“It’s all very well thinking of it as your pension fund but emotionally letting go of the family home can be a lot harder than many people anticipate.”
So is property still a suitable investment option for you?
People will always need somewhere to live but that doesn’t naturally mean that buying a property is a sensible long-term investment in such uncertain times.
Given the costs associated with buying a new house it’s worth considering a wider range of investment options before putting all your eggs in one basket.
Disclaimer: All investment carries risk and it is important you fully understand these risks and are willing to accept them. You may get back less than you invested.
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