Why buy-to-let property investment is still the best asset in the UK
Even though 2016 was terrible for property investors, the average house price rose by around 10%, and average rental yields settled at above 5%. Still, it’s considered that buy-to-let property investment had a tough year in 2016:
- There was a rush to invest before stamp duty land tax increases (SDLT) in April.
- The vote for Brexit sent shivers down spines, with property experts predicting a slump (adding to a long list of embarrassing predictions from UK experts who got it wrong).
- Other UK property tax changes started to kick in, though I’m not predicting (and never have) that they will kill the buy-to-let market.
- Donald Trump’s election was another surprise.
Mixed in all of this were stock market volatility, low-interest rates, and a reduction of cash savings protected by law (if you missed that, only £75,000 of your savings are now ‘guaranteed’, rather than £85,000). Oh, and the Bank of England is forcing banks and lenders to be extra tough with buy-to-let mortgages.
Despite all of this, buy-to-let property investment is still the asset in which you should invest. In this article, I’ll explain why.
Where else would you invest your hard-earned cash?
In the bank?
Property investment is still an excellent investment for income and capital gain, despite what the newspapers and so-called gurus are saying. Let me ask you a single, simple question:
Would you really want to sell your investment property, which is yielding 5% gross, for a cash savings account that pays less than 1%?
I didn’t think so. Neither would I. Okay, so we’ve ruled out cash. Not a hard decision.
In the stock market?
What about the stock market? Surely that’s a great prospect for your investment?
Well, yes and no. The stock market (as measured by the FTSE 100 Index) recently hit an all-time high. That’s would be great news if you invested in February 2009 when the FTSE 100 index stood at 3830. If you’d managed to get your market timing spot on, you’ll have seen your capital grow by about 90%. But what if you’d invested in 2000? Since then the stock market has bobbed up and down like a diver with lead boots:
- In fact, the FTSE 100 Index is only 4% higher than it was 17 years ago
- Compare this to the average house price in the UK, which the Nationwide House Price Index shows has increased by around 170% during the same period
On top of this capital growth, rental yield has also consistently beaten the dividends paid out by UK companies.
So, income and growth on the stock market are kicked into touch by property investment returns. Would you switch your buy-to-let property for a stock market portfolio?
Neither would I.
What about government bonds?
So, government bonds hmmm. They pay a yield of around 2% right now. Your capital is protected, so long as you don’t want to sell before they mature.
How about government bonds, then? Would you switch your buy-to-let property for a bond that pays 2% and no capital growth? Against inflation? Again, I believe the answer is a resounding ‘no’.
But I haven’t got £200,000 to invest
Here’s the thing about investing in property. While it’s a big-ticket purchase, it’s the only investment you can borrow cash to make. It is called ‘leveraging’, and effectively gives you free money – you make money on money that isn’t yours. Here’s an example:
Let’s say that in the year 2000 identical twins were each given £40,000 to invest. One decided to invest in the stock market, and the other in the property market:
- The first brother would now have a portfolio valued at around £42,000. He’d be earning about £450 in gross dividends this year.
- Meanwhile, the second twin, who used his £40,000 as a deposit and borrowed £40,000 to invest in a buy-to-let property, now has a property valued at around £210,000. If he sold it now, he’d walk away with a total of £170,000 – a gain of more than 300%. But he doesn’t want to sell. You know why? Because he gets a gross rental income of £10,500 per year.
That’s the power of property when combined with leveraging for long-term investment: it’s how to make free money from property investment.
Should you invest in buy-to-let property in 2017?
Yield on other assets is dismal if not non-existent. Capital growth is patchy and volatile. Meanwhile, when you invest in property you benefit from:
- Demand for housing in the UK that far outweighs supply
- The private rented sector is expected to grow by around 1.8 million households by 2025
- Rental prices are rising
- Mortgage rates are low, and you can make money on other people’s money
I think the answer to the question posed is a resounding ‘yes’.
Perhaps the only cloud on the horizon for property investors is the way that higher rate taxpayers will be hit when the full effects of the reduction in mortgage interest rate tax relief come in in 2020. And to mitigate that, you might decide to set up a limited company or partnership to invest in property. Which is best (if either) will depend on some factors, including your tax position and investment goals.
To discuss how property investment could benefit you, contact one of our team today on +44 (0)207 923 6100. We’ll talk you through all the property investment opportunities available to you, and how you could profit from an investment that’s hassle free and gets your money working for you, rather than for other people.
Live with Passion
Brett Alegre-Wood
