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Why Invest in Buy-to-let?

Residential property keeps performing well

UK residential property has been the best performing asset class in the last 50 years according to the Barclays Capital Equity Guilt Study & ODPM housing statistics.  These figures showed that in real terms (after inflation) £100 invested in a portfolio of shares in 1930 would have grown to a little over £363 by the end of 2004 compared with £767 if that same amount had been invested in residential property.  The other thing about property investment is that it is possible to borrow money to finance your investment if you are familiar with things you need to know about BTL mortgage finance.

Demand for residential property is not meeting supply

The latest population projections published by the ONS (Office for National Statistics) has revised upwards estimates of net immigration from 145,000 to 190,000.  The forecast now is that the UK’s population will increase to 65 million in 2016 & then 71million by 2031; a jump of 10.5 million on current levels.

This calls into question the ability of the UK house builders to provide sufficient numbers of dwellings to accommodate this increasing demand. Existing projections for house building before the revised population suggests that their will continue be a shortfall of housing each year of around 33,000 dwellings.

This means that the existing shortfall of residential property will continue and if anything get worse.

Lack of affordability means a growing number of renters

Increasing numbers of first time buyers have to rent because they can no longer afford to buy a property.  This means that demand for rental property continues to grow providing an expanding market for landlords to let their rental property.

Shift in lifestyle to a renting culture

Young people are increasingly settling down later in life preferring to have a more footloose lifestyle.  They therefore want the avoid the constraints associated with residential property ownership by renting a property during their 20s & early 30s.  In addition, high levels of family break down means that individuals accommodation needs are more dynamic.  Employers also require their workforce to have greater levels of mobility often requiring staff to work away from their home base for short periods of time.  All these factors require a dynamic private rental sector to cater for individual rental needs.

Why do investment funds not invest in residential property if the returns are so good?

There are a number of reasons why professional investment funds have stayed away from direct investment in residential property.  Firstly, the whole area of private landlordism has been a real ‘political hot potato’ up until the last 10 years. Housing was seen by some members of the political classes as something not to be profited from, like the NHS.  The very idea of private investors making money out of peoples need for housing was seen as morally wrong.  As a consequence the Labour Party for years had introduced a whole series of restrictive Rent Acts, which prevented landlords charging market rent as well as obtaining vacant possession.  An investment in an asset that the investor was prevented from selling at its true market value (with vacant possession) was obviously not something the institutions wanted to get involved in.

The other factor that put them off was the relative intensiveness of the management process.  An investment fund can invest £5+ million in a single commercial building, with one tenant who remains for 25 years.  A comparable sum invested in a residential property could involve having to buy and set up say 50 individual properties at £100,000 each.  Then each of these properties & tenancies would have to be managed, all this is time consuming and expensive.

This is why the private rental sector has been largely left to entrepreneurial private property investors and landlords to develop.  After decades of decline the private rental sector partly as a result of the deregulation of the sector in the 1980’s and partly due to more available finance bought about by the buy-to-let initiative in 1997 has started to grow again.  Latest figures suggest that the sector now accounts for approximately 12% of the residential stock, up from a low point of just under 10%.

Why not invest all my money in residential property if it performs so well?

There are a number of reasons why it always good to have a range of investments.  If you already have a large ‘buy-to-let’ portfolio of residential property without much of your assets invested elsewhere, a landlord may wish to consider diversifying their investments.  The classic phrase is ‘don’t carry all your eggs in one basket’.  Investing is much the same.  Whilst over the years I have always held most of my assets in residential property; I have also held a proportion in alternatives such as shares and deposit accounts.  As an active investor I am always looking for new and innovative methods for diversifying my portfolio.  The theory is that if one investment isn’t doing so well, as was the case for shares for a number of years.  Then some of the other investments are doing a lot better.  The result you hope is that overall your capital keeps on growing.

You may still be keen to invest more funds in residential property but feel that you don’t have the time or skill to do it yourself.


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