Income or Capital? What Do YOU Want From Property Investment?

24 Feb

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With all the talk of sky-high buy to let returns, it’s easy to get overly excited and rush to buy the first property you think you can make a buck on.

But, wait.

Before you barrel in with any property purchase, it’s critical to first think to yourself: Why?

Why am I investing in property?

Property is not a passive income stream, no matter what the glossy articles and TV shows say.  Property can be a good way to make money, but it’s not passive.  Even if you have a property managed by agents, the buck and the responsibility still falls to YOU – even if you’ve paid an agent to take on most of the donkey work.  Plus, don’t forget you still need to manage the agents – and some will require far more “management” (aka chasing to get stuff done) than others.

financial freedom

The attraction of property as an investment isn’t hard to understand.  We all need somewhere to live and want our own place to call home.  Investing in a basic necessity is a good call.  However, when investing in property it’s still really important to think through what you hope to get out of it in the end.

In the end, most people don’t start at the beginning…

Many people start their journey in property with no forward planning.  It could be a former home failed to sell and so was rented instead, or maybe even a property seemed so cheap it had to be bought up.  Either way the danger with this approach is before you know it, you’ve got a shedload of debt around your neck, tenants who want stuff doing and a property which needs maintaining.

Then what?

This is the stage at which many landlords start to question their strategy. Or rather lack of.

Property investment from the get-go needs to have a purpose if you are to make the most effective returns.  And that includes considering the whole income vs. capital question.  Like it or not, you don’t generally get both.  A property which produces high rental yields is unlikely to appreciate massively in capital value, and a property which is set to soar in value is unlikely to produce stellar income yields.

The simple fact is – you have to pay more for the properties which will likely increase in capital value – because they will likely increase in capital value.  And the more you outlay for a property from the start, the harder it is to get the rent to stack.  London is a case in point.  Investors in the capital don’t tend to make their riches from the rents (although they are stonkingly good), the real money is made on the sale of the property and the capital uplift.

How about properties which make good rental machines and income yields?

Well, income generating assets are always in demand, but the capital value of the property is heavily influenced by the income derived.  Buyers tend to remain price-sensitive (it’s always, always about income) and these types of property investment struggle to appreciate much in capital value.  That’s not to say the value doesn’t go up (the underlying asset will increase incrementally over time), but the growth of an income asset will be slower than a capital growth asset.

Don’t believe me?

The fact is you can still buy many terraces in the North for under £50k which will rent for £400+ per month.  Properties bought for income versus properties bought for capital appreciation are poles apart.

What you want and need from property investment – income or capital returns – will very much depend on your personal circumstances.  The money you have to invest, where you live and how much finance you can raise will have a massive bearing on the type of property you can buy.  However, it’s still critical to always think to yourself: Why?

Why am I investing in property and what do I want to achieve?

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