If you are in the fortunate position of having free income or capital to invest, how do you find the right investment for you?
There is a considerable amount of information out there to read up on the benefits of investing in low, medium or higher risk options.
There are also opportunities to speak to specialists to get advice on what might be right for you, this includes banks (although most will be limited to certain investments they offer) or an Independent Financial Advisor (IFA) who generally have a bigger variety of investments they can advise on in comparison to banks.
But even with this there seems to be a lot confusion around the benefits and suitability of property as an investment option when compared to investing in stocks and shares and other more typical investment products.
From extensive conversations with clients, one of the main arguments which IFA’s make against investment in property is that it is an “illiquid investment”.
This means that once you have made the purchase, your hard-earned cash will be difficult to free up should you decide a different investment vehicle would be better suited to your needs.
The process of selling a property to release your investment capital can be a lengthy one with many of the variables out of your personal control, meaning there can be no argument about the liquidity of property as an investment.
There are also the hurdles of more recent changes to legislation, making it more costly for landlords to acquire property.
The question which could be asked however would be “is this medium to long term outlook any different from signing yourself into the 5, 10 or 20 year investment deals that many IFA’s would most certainly recommend?”.
The second point which appears to have been made, and perhaps the point which is most relevant to our practice, is that property is not recommended as it is not tax efficient in comparison to the other available options.
With the markets performing so unpredictably in the current climate, should IFA’s consider breaking the mould and recommending that a greater percentage of a client’s portfolio is made up of property?
To help answer this question, let's take a look at some of the widely recommended investments when embarking on an investment portfolio, and the tax implications of any gains made from them.
Individual Savings Accounts
An ISA is a savings or investment account available to UK residents and is exempt from income and capital gains tax on any return, which makes it a popular option for an investor.
Each individual has an allowance they can invest in each tax year, which is set at a limit of £20,000 in the 2018/19 tax year.
There are several options available to you which can be placed into three categories:
- Cash ISAs
- Specialist ISAs
- Stocks and Shares ISAs
Cash ISA’s and Specialist ISA’s (Help to Buy, Junior etc) are popular amongst those investors who do not seek an intermediary to offer financial advice, and who opt for a low risk approach to savings and investments or as part of wider portfolio.
They can be instant access or fixed term, and will attract an interest rate offered by the provider.
This can mean slow growth but also security that the capital invested will be returned.
For those who do seek financial advice and a more diverse portfolio, the Stocks and Shares ISA appears to be a popular option.
A stocks and shares ISAs are just stocks and shares wrapped in the ISA to achieve the tax efficiency.
One of the greatest selling points when it comes to investing in an ISA is always going to be that any gains will be tax free and the 2018/19 £20,000 can be invested in any single ISA or a mixture of all choices available.
Whilst the obvious draw of a tax-free gain is undoubtedly an attractive proposition, it cannot be said that this kind of investment is without its drawbacks.
Stocks & Shares
For investors who do not feel experienced enough to choose their own funds, many IFA’s will recommend a choice of fund providers.
These types of organisations will charge fees, typically around 1.2%, to invest and manage your capital.
The stocks and shares ISA will always carry risks as there is no guarantee that you will get the original investment returned as the value of the fund can fall as well as rise, unless the provider offers a particular security as a feature.
Depending on what the provider invests in within a fund, each fund will carry a different risk profile.
A lower risk option would be an “income fund” which holds blue chip stock and high-quality fixed interest bonds, reinvesting any gains which are received and building your pot slowly over a period.
There are also higher risk options with the potential of higher returns, and there many examples of investors choosing the correct fund and achieving higher than average returns, especially over the longer terms.
The growth can be volatile and therefore to ensure you achieve the optimum then you will need to be prepared to leave the funds during periods of dips.
You can withdraw funds at short notice in most cases however these dips can make this type of investment is illiquid in the same way an investment in property would be viewed, but it appears to be much more likely to be recommended by your IFA.
It is also important to note that as the amount invested rises above £200,000 you will find that this type of fund gives you access to different types of investment product which are more complex than you might find yourself dealing with alone.
Whilst these types of investment are widely recommended, they both include vehicles for which the gain will be interest based.
As worldwide stock markets transition from bull to bear, struggling to break even in 2018, and with the UK base interest rate remaining at a historic low despite the Monetary Policy Committee’s recent 0.25% increase, should the tax treatment of what gains these kinds of investments do draw be the primary concern for any investor?
Meanwhile in the last 12 months UK house prices have risen by 2.9% (not taking in to consideration the rate of inflation).
Whilst this figure may seem less than impressive relative to prior performance, geographical variances in the level of return are vast.
This is in part due to the ripple effect from 2007 taking its time to reach further North but also reflects a general decentralisation in the UK away from London helped by major investment into the Midlands and North.
The levels of capital appreciation shown in the table below (left) would be hard sought after for any novice investor speculating on the open market or perhaps even more difficult for professionals to deliver once their own fees are accounted for.
We must bear in mind that this growth in value is just the beginning of the return on your property investment.
In terms of rental yields, the story is similarly polarised.
The expected returns can be broken down geographically as we have found with the overall value of the investment.
In this case, the difference in yield can be broken down in to areas as small as individual postcode.
The table above shows the average gross rental yield in some of the most profitable postcodes in the country in comparison to the potential yields in London where the initial investment may be over and above the price point of most.
As a general rule in the current market, yields are higher further North or in the Midlands, although property in other areas of the UK still provides an extremely competitive investment against other options.
There have been recent surveys carried out by the comparison website, Totally Money, which detail areas by yield and is a good source of information when deciding where to invest in property.
This steady and reliable income stream is another benefit of property investment, especially if an interest only mortgage has been taken out.
The savvy property investor will be looking at a gross yield of more than 8%.
Another advantage of property investment over investment portfolios is for those wishing to invest but without access to a large amount of savings.
One of the key advantages of property investment is that in many cases you can borrow up to 75% to purchase the asset (called Gearing), and then get your tenant to pay the interest on the loan, which should leave you with a profit and an appreciating asset.
For example, you buy a £100,000 house, with an interest only mortgage of £75,000 and deposit of £25,000. The property increases in value by 10%. You still owe £75,000 but the property is worth £110,000 meaning your investment has now increased to £35,000.
However, as with any investment there is also the risk of 'negative gearing', i.e if the property value decreases then your investment will decrease in line with this.
When trying to consider which investment option is the better investment, you can be inundated with graphs and statistics that show over the longer term that stocks and shares out perform property.
These can be very convincing but it doesn’t always tell the whole story.
As you can see from the detail on growth and yield above, when you dig deeper it is clear that if you choose property in the correct geographical area, and do your homework around costs and any potential improvements you may have to do, property can out perform investments.
The key when investing is considering your own risk profile and the diversity of investments in your portfolio which leads back to considering all opportunities out there, including property investment.
Liked this article? Try reading: Why should you use a specialist adviser like Mortgages for Yacht Crew?
Disclaimer: Mortgages for yacht Crew does not provide advice in relation to savings and investments. This article intended for discussion only and does not propose any financial advice. Consultation undertaken with regard to UK property yields with Jack Whathen of Anchor Property Solutions