I recently blogged about how many older people had contemplated utilising their pension funds to invest in Buy-to Lets because of rising house prices. In that blog, I cautioned the tax implications and advised a closer look. However, I understand that many of you feel more in control with a bricks and mortar investment than with shares.
Some Figures: Shares versus Property
It’s a long running debate – shares versus property – and the truth is that whichever one comes out on top depends on which period of time you run the figures for. I read an interesting article in the Sunday Times (14th May) that if you’d invested £100,000 in a property in 1989, by now it would have produced 201% return (According to the Halifax). Conversely, Stockbroker Charles Stanley claimed that the same investment and time period in shares would have given a 203% return. It’s close. And, what happens in the next few years will depend on many factors. More importantly, do you actually want to have to worry about it? If you’re an adventurous, savvy type, you may want to search the market for companies that the stock market has undervalued and invest in them, hoping you’ve spotted a winner. Or you may notice a residential area that is “on the up” and purchase a low price “property with potential” which you think will ride the area’s tide of resurgence.
But most people don’t do that – they simply don’t have that tolerance to risk. They usually make decisions on an emotional, situational or behavioural level or simply follow what their parents did. A more pertinent approach would be a balance across the asset classes (cash, property, equities, gilts and fixed interest) Doing this can allow you to indulge yourself in property if you so desire, but it has a countered investment in other areas so that not all your eggs are in one basket.
UK residential property funds
Another way of benefiting an upturn in the property market without getting your hands too dirty is to invest in one of the new UK residential property funds. You can often incorporate these into an ISA and they aim to match the average increase in house prices. Buying equities (shares) in property-related businesses is another potential way of getting your money to track an upturn in the housing market: Building contractors, developers, property companies and associated firms may see a rise in share price in housing upturn.
Actively managed funds – where a Fund Manager buys and sells shares within your portfolio on your behalf – are another way of creating investments in the property sector, as are Tracker Funds which follow the movements of a particular stock market.
Buy to Lets
Buy To Lets can be attractive, particularly because they allow you to “leverage” your money, effectively allowing you to use a smaller amount of money – your deposit, to own a larger asset – the property, with typically (recently) low borrowing rates. But remember that property development can be hard work and very often involves a hands-on approach, which fund managed shares and other assets do not. If the returns in the long term are similar you may want to take the hassle-factor into consideration.
So, if property is pulling at your sleeve, begging you to invest in it – just be balanced. Talk to us: We help our clients create balanced investments that match their attitudes to risk as well as their aspirations for their planned lifestyles in retirement. Just remember the adage “What goes up, must come down” and avoid anything that looks too good to be true!
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This post was written by John Davies