In this blog, I delve into why property may or may not be a good investment for you.
I don’t intend this to be an extremely detailed blog, but more of a short overview of what makes it an attractive option.
Property is one of the most popular ways people invest their money.
In the UK, land and property account for over 50% of household wealth.
Please note that any information supplied on this website is for entertainment purposes only and should not be taken as financial advice. Any reader should do their own research and/or consult with a qualified financial advisor.
What Gives Property its Value?
Property has an intrinsic value as people can stay, live, and work within a property.
Safety is the second run on the ladder of Maslow’s hierarchy of needs, and shelter forms an important part of this safety.
It is no wonder therefore that property investment is an enduring trend. The best investments are ones where there is a “need”.
Most people need property and land so it has a natural advantage over many other investments.
The property also can produce an income through a rental yield.
Property valuation can therefore be viewed as an exercise in measuring the comparison between a property, and other properties with similar values, the future market value of the property, or as a cashflow multiple of the rental yields over time.
Perhaps most importantly, people understand bricks and mortar. Investing in areas where you have understanding is important, and most people can understand the property business. The simplicity of this investment therefore makes it an accessible way to build a huge business.
Has Property Been a Good Investment?
Over time, it appears that property has been a variable investment.
Of course, in recent years we have seen a massive surge in house prices, but it was not always the case.
A fascinating Schroder post uncovers the following:
Key Historical Trends:
- Housing Stock Growth:
- Between 1851 and 1911, the number of houses in England, Wales, and Scotland more than doubled from 3.8 million to 8.9 million.
- Presently, the housing stock exceeds 28 million.
- Smaller Houses:
- The average house size significantly decreased post-1850, with plot sizes shrinking from 913 square meters to 268 square meters.
- Rising Incomes:
- From 1845 to 1911, average house prices fell by 23%, while earnings rose by 90%.
Despite these trends, home ownership was uncommon in the 19th and early 20th centuries.
By 1918, over 75% of people rented their homes. The shift towards home ownership began in the mid-20th century, peaking at over 70% in the early 2000s.
However, affordability issues have caused ownership rates to decline to 63-65% in recent years.
Regional Variations:
- London: The average house price is 12 times the average earnings.
- South East & South West: High house prices influenced by London commuters and second-home buyers.
- Midlands: Houses cost around 7.5 times the average earnings.
- North West & Yorkshire: Houses cost around 6.5 times average earnings.
- Scotland: Houses are the most affordable, at about 5.5 times average earnings.
Women face worse affordability due to the gender pay gap, making houses more expensive relative to their earnings compared to men.
Conclusions on these Findings
These findings are interesting mainly because they reveal that what people are willing to pay for a property varies greatly according to circumstances at the time.
Houses cost over 12 times the average annual salary in 1845, yet by 1915, they were only worth two times the average salary.
Are properties simply returning to their original values?
Investing in Property as Forced Savings
Probably the main reason why people lose money on investments is because they don’t see it as a long-term game. They cash out their investments early and at a loss.
Taking out a mortgage on a property and buying a property in the first place is a huge decision.
Also, as it takes a lot of effort to trade houses, people tend to stay more invested in a property than they ever would be in a stock.
For this reason, property is usually a wise investment for the average person, as long as they can afford it.
Downside Risk
Warren Buffett has also alluded to the theory that house prices are more likely to stick within a range of their intrinsic value. This means that whilst the 10-100 time returns on properties are less likely, there may be less downside risk.
Loss aversion is a cognitive bias which arises whenever people engage in mental accounting – we find the pain of loss to far exceed the pleasure of a gain. I have often found when I talk to people, that when we talk about investing, they are particularly terrified of losing money.
Someone like Warren Buffett can manage his emotions and is more resilient when the market falls. He has confidence in his ability to evaluate businesses, so he can generally be confident despite the irrationality of the market.
I like to invest in REITs (Real Estate Investment Trusts) as they tend to trade less efficiently than houses on the market and can thus sometimes trade at a significant discount.
At the moment, as I have mentioned in other blogs, aside from my significant investment in BABA, I have a substantial bet on high-quality REITs delivering excellent returns over the next five to ten years.
These returns will not only come in the form of dividends but also capital appreciation.
Dividend Tracker
This dividend tracker is what I use to track my own dividends month-by-month. It’s a great tool for seeing your dividend income month by month and visualising how you see fit year after year.
The Joys of Leverage
Despite returns on property simply not matching those of the stock market, the story would not be complete without discussing leverage.
Leverage allows you to gain a greater return on your money.
For instance. If you invest £100,000 in a single property in cash and it rises to £120,000, you’ve made 20 per cent on your money.
However, if you were to buy four £100,000 properties by investing £25,000 in each, and each property went up £20,000, then your overall return would be £80,000 minus fees.
Quite simply, you would have made a far greater return on your investment whilst achieving greater diversification across the market.
You may also achieve a higher overall rental amount after subtracting the mortgage.
Naturally, however, you will be exposed to compounded downside risks if your properties reduce in market value.
After you have built up equity in each property with the rise in its value, you can remortgage and utilise the freed-up funds to purchase your next property.
Money at the Buy
The most significant gains for the property investor are usually experienced when they buy an undervalued property and then make sensible improvements to the property.
The best way to find undervalued properties is to check the listed sale price against comparable sales in the area. A similar house in the same area should cost less than
In US real estate shows, they refer to this practice as looking at the “comps” or “comparables”.
A good piece of advice is to buy the worst house on the best street, rather than the best house on the worst street.
These improvements could include a garage conversion, a new kitchen, a new bathroom, creating new bedrooms by putting up walls, landscaping and installing new windows and doors.
Alterations to a property should be carried out rationally with your mind firmly on return on your invested capital.
Again, looking at comparable properties in the area is a fair way to calculate your expected return on investment.
Always pick these alterations carefully so you do not overspend.
Conclusion
In summary, property investment holds enduring appeal due to its intrinsic value, safety as a fundamental human need, and the potential for rental income.
Historical trends reveal fluctuating house prices, driven by economic and social factors. While property has shown variable returns, its relative stability and the ability to leverage investments make it an attractive option for many.
The key to successful property investment lies in long-term commitment, careful selection of undervalued properties, and strategic improvements to maximise returns.
Ultimately, property can be a valuable addition to an investment portfolio, offering both income and capital appreciation over time.
Remember that property is also potentially someone’s home, so the value of a property goes beyond its market value – it has a fundamental use in your life.
An important consideration as well if you are purchasing an investment property is whether you purchase it in your own name or through a company as this is the difference between paying income or corporation tax, the latter of which is lower.