With house prices having fallen slightly last month, various predictions are being made as to how much the market will cool in 2015. The consensus seems to be that there will be moderate house price growth but, with many investors predicting a small increase in interest rates in 2015, it seems unlikely to be anything like the levels experienced in recent years.
Whether it goes up or down next year, investing in property can be tough and there’s much more to it than just the level of house price growth.
Illiquid
For starters, property is highly illiquid. Certainly, there is buoyant demand for properties in the south east of England – especially if they are located within a ten-minute walk of a tube station or train station with reasonable access to central London. However, even then it can take months for a transaction to complete, with the usual solicitor and estate agent fees gobbling up a chunk of profit at the same time. And, while illiquidity may not seem like a potential problem when things are rosy, if you need the cash for something else then it can be a major challenge to overcome.
Initial Fees
As mentioned, estate agent and solicitor fees are costly when you sell. However, when you buy there are numerous additional fees, such as the cost of a surveyor and stamp duty. The latter is a real killer and has not moved upwards much in recent years even though house prices are now considerably higher than they were even 15 years ago. As a result, expect to pay many thousands of pounds before you even own the property.
Ongoing Fees
Once you own the property, the fees don’t end. Unless you want to be the main point of contact with the tenant, a managing agent will be needed and they normally charge around 10% of gross rent. Add to that the cost of furnishing the property, ongoing maintenance (such as boiler checks, electrical checks, wear and tear) and your 4% yield suddenly starts to disappear. In addition, service charges and ground rent for flats can hurt your bottom line even further.
Taxation
Unlike shares, property does not come with anything like the same tax advantages. Certainly, mortgage interest payments are tax deductible, but this is not such a great advantage when interest rates are just 0.5%. While shares attract a tax rate of just 10% on dividends (basic rate), property income is taxed at the income tax rate of 20% (basic rate). Furthermore, while shares can be purchased tax efficiently through an ISA or a SIPP, residential property is not allowed in either of those tax wrappers.
Tenants
Of course, the vast majority of tenants are great, pay their rent on time and treat the place as if it were their own. However, you could end up with a tenant in the minority who does the opposite and, as many landlords have found out to their cost, the process of evicting a tenant who doesn’t pay can be very expensive and time-consuming. Furthermore, even if you get great tenants, there will inevitably be void periods where your investment is earning you zero in rent.
