Is property investment right for you?

We are often asked whether property investment is right for you?   The answer to this question will depend very much upon the individual, their attitude to risk, the amount of disposable or investment income available and the type of property investment they have in mind.

Many individuals invest in property to boost their income and gain greater financial security and whilst the journey can be rewarding, it also requires committing a significant amount of time and money. So, how do you know if property investment is right for you?

In this briefing we outline what you need to consider when making your decision, from assessing your personal finances and setting goals for the future to exploring the pros and cons of becoming a property investor.

Is property investment right for you? Make a well-informed decision

Before you step onto the property investment ladder, it’s important to understand your financial situation and the risks involved in this kind of investment.

Do you have a strong financial foundation?
Investing in property requires significant upfront costs, so assessing your current financial situation first is vital. Do you have the funds available to cover a deposit and mortgage repayments? Can you afford to pay for the necessary repairs and maintenance?

Working with a financial expert to assess your income, savings and any existing debts can help you better understand your personal financial health. The stronger your financial foundation, the easier it’ll be to weather potential challenges associated with real estate investment.

What’s your appetite for and attitude to risk?
While property is usually a safer investment option than stocks and shares, there’s no guarantee you’ll get a good return on your investment. Properties can depreciate in value, and unexpected expenses can add up – so you need to think carefully about your appetite for risk.

What would happen if your property depreciates in value or something else goes wrong? Could you afford to lose the money you’ve invested?

Exploring strategies such as diversification and taking out property investment insurance can help you mitigate some financial risks along the way.

What are your investment goals?
Before you make your decision, you should think about your investment goals. You can start by asking yourself a few questions:

• How will you generate an income? Knowing how you intend to make an income from your investments can help you set achievable goals. Will you rent to tenants, turn properties into holiday homes, or renovate them to increase their market value?
• How much money do you want to make? Think about your financial goals. How much are you hoping to earn from your investments, and in what time frame?
• How will you use the extra income? Will your investments help you achieve a particular financial goal? Perhaps you want to use the profits to help fund your retirement, or maybe you just want to gain more financial freedom.
• Do you want to grow your property portfolio? What are your long-term investment goals? Will you focus on one or two properties, or are you hoping to build a large investment portfolio over time?

Knowing the answers to these questions can help you set realistic, measurable goals that align with your current financial situation and long-term strategy.

Can you take on the extra responsibility of property investment?

Money isn’t the only resource you’ll need; property investment is also a significant time commitment. Whether you operate as a buy-to-let landlord or a property developer, property investment requires active management.

Consider whether you have the time to carry out extra responsibilities such as property maintenance and repairs. Furthermore, if you become a landlord, it’s your job to provide a safe home for your tenants, which means you must ensure it meets certain standards before you can rent it out.

How to get the most out of your property investments

Thinking of investing in property, do your research

Aspiring property investors should carry out thorough market research before taking the plunge.

Looking at current property prices and mortgage rates can help you find the deals that work best for you. Keeping an eye on market trends can also help you determine whether now is the right time to invest in property.

There are several factors you’ll need to consider in 2024. A recent forecast from property website Rightmove suggests that average house prices in the UK will fall by 1% this year, which could be good news for property investors on a budget.

Meanwhile, changes in market interest rates mean that the cost of mortgages is coming down. Earlier this year, Bank of England governor Andrew Bailey told MPs that he hopes this trend will continue as UK inflation approaches the Government’s 2% target.

On the other hand, ongoing economic issues and higher property taxes in 2023 contributed to thinner profit margins for many UK property investors. As a result, more landlords have been streamlining their portfolios or exiting the buy-to-let market altogether.

The property investment landscape is likely to shift further in the coming year, so choosing the right time to invest is key. Working closely with property experts and financial advisers can help you make well-informed investment decisions that set you up for success.

Diversify your investment property portfolio

Diversification is a key component of investment risk management. Spreading your investments across property types and locations can mitigate the impact of market fluctuations on your overall portfolio.

Let’s say you own residential properties in several different locations across the UK. If the housing market worsens in one area, you’ll still have a steady income from your investment properties in the other locations.

Additionally, diversifying your property investments means you can benefit from different income sources. This not only boosts your overall returns but also gives you a stronger financial position, helping you navigate market changes and take advantage of opportunities in different parts of the property and real estate market.

Consider the structure in which to make the property investment

We asked one of our property experts, Wes Mason for his  thoughts on how you might structure a property investment, “The tax rules surrounding the taxation of property can be complex and where the investment is made in personal names – either directly or via a partnership (including Limited Liability Partnerships) – there is a restriction on the tax deductibility of finance costs from the rental income. This will have consequences on the amount of tax that you might pay if you are a higher rate or additional rate taxpayer once the rental profits (before finance costs) are taken into account. This restriction is commonly known as section 24 in shorthand to section 24 of the Finance Act 2015.

Therefore, it might be advantageous to consider whether to purchase any investment properties through a special purpose vehicle – such as a limited company – which is not affected by section 24 and obtains tax relief on all associated costs of holding investment property. However, limited companies come with their own complications such as the filing of accounts (albeit often of a reduced disclosure) in the public domain and potentially higher rates of tax where funds are needed to be withdrawn or the plan is to sell the property in the longer term. That said, limited companies offer excellent opportunity for planning extraction of profit from a timing perspective and can allow for the passing of portfolios down the generations in an easier manner.

How you should structure the investment in property is ultimately personal to you, based on your current circumstances and plans for the future”.

When investing in property, you should work with financial experts

You don’t need to embark on your property investment journey alone. As your financial advisers, we can provide support every step of the way, whether that means helping you decide whether property investment is right for you or offering expert tax planning advice.

Professional accountants can also take on many of your financial management and bookkeeping tasks, reducing your administrative burden and freeing up more time for you to focus on your other responsibilities.

If you would like to speak to one of our tax team or property accountants about investing in property either as an individual, a limited company, as part of a partnership or a property syndicate, we can help.  Contact us or telephone us on 020 7870 9050.

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