Don’t bank on the banks for better rates of return
income families and first-time buyers to afford their own home. It is estimated that almost one in four households will be renting from a private landlord by the end of 2021. Investors have two main routes. Some opt for “home flipping” – searching for run-down properties, refurbishing them and selling them for a profit. Others look for properties that can be rented to generate a consistent income.
Buy-to-let had been booming but more recently the government has set its face against the sector, accusing it of making it harder for people to get on the housing ladder.
Consequently, buy-to-let costs have risen and in many cases returns have therefore been eroded.
Purchasers of second properties now pay rates of stamp duty three percentage points higher than those for ordinary buyers. Tax relief changes between now and April 2020 could significantly increase the amount of tax payable by higher and additional rate taxpayers.
And if you subsequently sell the property, capital gains tax comes into play – 28 per cent for higher and additional rate taxpayers and 18 per cent for basic rate taxpayers.
And while yields can be good, typically around the 4-5 per cent mark, the property market is also highly illiquid – probably not for those who may need to access their money fast. So what about shares? Stocks are very liquid, quick and easy to sell. Over the long term they can usually be expected to outperform most other asset classes.
But they rise and fall depending on economic sentiment and company performance. It can therefore be something of a rollercoaster ride. Important then to ensure diversification through a mix of investments – geographically, by company size and by sector.
A further mix of both active funds run by professional fund managers and passive funds such as index trackers is another approach.
An alternative is Real Estate Investment Trusts (REITs) or buying individual shares in house builders, providing exposure to property while allowing for diversity. Owning a REIT combines some of the benefits of stocks with some of the benefits of real estate.
Equity income funds is yet another possibility, but there are many.
Tax efficiency through wrappers such as Isas and pensions is also key.
Always be aware that your investment, whatever it is in, can go down as well as up. Trevor Law is managing director of Eastcote Wealth Management, chartered financial planners, based in Solihull. Email: tlaw@eastcotewealth.co.uk The views expressed in this article should not be construed as financial advice