1st November, 2016 buy to let

  • It’s become the accepted wisdom that the path to a wealthier, more secure future is through property. Or is it? 

    Admittedly, prices have risen substantially since the crisis of 2008. But this has more to do with monetary policy and tax funded government incentive schemes than any real world fundamentals. 

    However, ask anyone who has invested in property recently, and they will jump down your throat with a different story: shortage of supply, increased population growth, migration, overcrowding, shortage of land are the real reasons prices have risen and will continue for generations to come. 

    Which leads me to a simple question: If property is so good, why aren’t the majority of the UK’s two million property investors rich? Surely the country should be awash with Ferrari driving landlords. Right? 

    But it’s not. Less than 1.5% of buy to let landlords in the country have amassed significant wealth through property. For everyone else, little has changed, except the increased debt burdens investors have taken on to finance their investment purchases. 

    So why this unshakeable belief with property as a sound investment? 

    Simply this: the press have convinced most people that property investment is a one way street. And television programmes on TV reinforce this - increasing the social proof - everytime they profile the few investors who have made it big. Add to this the avalanche of studies which pour out every month from big name estate agents that selectively compare investment returns on property to the stock markets, entrenches this belief further. 

    Yes, prices have risen substantially - especially since the mid 70’s. But look more closely at the data after inflation is factored into the calculations, and real price have only risen between 3-5% annually. Not much better than blue chip stocks. And certainly not enough to make you wealthy. 

    Now I am not criticising property as an asset class. It’s our business, after all. But it is not a one way street. There are risks and many categories of risk which must be calculated and considered before making a purchase. Simplistic decisions based upon how nice a property looks or the popularity of a neighbourhood, is like investing your life savings into the shares of Guinness because you like the taste of it. You wouldn’t do that. Would you?

    Instead, property should only be considered if there is a more than reasonable chance it will meet your pre defined financial objectives: how much exactly do you want to make from the investment before you cash in? More importantly, how long are you prepared to hold the investment in order to meet your objectives?

    On the flip side you also need to identify and evaluate which risks could derail your objectives and plan for such eventualities. For instance, is the future macro economic and market climate conducive to your plans? Or a threat? What future regulatory or tax changes could hinder or delay your objectives? I think you get the point.

    Purchasing a buy to let property without a roadmap of where you want to end up is like driving off in a car with no destination in mind. You’re going nowhere and quite possibly could end up in a place you’d rather avoid. 

    Property investment won’t make you wealthy unless you plan properly for it to make you wealthy. So start your research and planning today if you want to join the minority of property investors who are wealthy. 

    by: Prime Asset Investments

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