In the current climate where the stock market has been volatile and where income driven investments such as gilts or bonds are paying very low yields, investment in residential property has potential to offer improved yields and stability. There are several important factors which need to be understood and considered to get the best return from your investment such as management of your property investment, tax position, funding of your investment etc… Another aspect of these is the actual choice of property itself which can impact both bottom line income and also has consequential impact on other considerations. There are two types of strategy in property investment which are very similar to equity investments in their stance and risk position. The first is investment for income and the second is investment for capital growth. It is possible and desirable to achieve both but for the purpose of this discussion we should try to target each stance independently.Location – Income influencedThe question here is not specifically about the entry value per property but about the yield it can return based on it’s annual cost versus annual return. This yield is usually expressed as a percentage. Market rates vary drastically across the country but of course this is usually reflected by the cost of purchase and if applicable on-going maintenance costs. The interest from an income point of view is to obtain the higher rental income potential for the lowest given cost. Consider your location in terms of it’s past stability for rental market price and it’s potential in the future. The ideal situation is where your location has a stable rental market price at a reasonable cost position but also has potential to increase in desirability and achievable rents as the area around it grows or develops. Risk is lower than capital growth influenced investment due to past performance being a more reliable indicator of future rental income potential.Location – Capital growth influencedHere the influences depend largely on funding limits, timescale and attitudes to risk. It’s a given that you are looking to invest in an area which has potential to increase in desirability in the future. This may be driven by past performances or by some speculation or logical assumption of a change coming to an area. London is a good example where there is consistent growth history irrespective of other market forces, yet within that certain areas of London have grown faster in their own right. To some extent the amount for investment will dictate the areas available to you. Here research into future potential is critical as it’s easy to buy into a sales pitch and end up paying more than you should for a location which doesn’t have the right potential. Risk levels in capital investment are higher, generally the larger the single property value investment the larger return potential however conversely the larger the loss if it goes wrong. Market forces have a much more significant impact of capital based investment and location can play a significant part in this.New or old property? – Income influencedNew properties are attractive to income based investors in that they have a lower operating cost. The infrastructure in terms of heating systems, electrical etc is fully compliant and needs no investment or updating at least in the short term. However newer properties may not have the same prestige or image as old properties and may not be able to attract tenants as easily. Also newer properties tend to have smaller room sizes on average and be limited in terms of parking spaces and garden sizes. The downsides of a new property choice in respect to desirability may be offset somewhat based on it’s location. Watch out for new build areas in the city centres as the demographic changes.Older properties may command slightly higher rents and better overall desirability but come with a higher cost of maintenance. Older properties also are likely to need to be brought up to standard and need to meet current legal legislations.New or old property? – Capital growth influencedLocation really takes priority over property type. However the state of the property and it’s on-going cost may impact your investment over the time you expect it to grow in value. Here the older property is likely to cost you more but is also likely to be in the most desirable locations and growth potential areas. The older property can sell itself at a higher rate based on heritage and prestige providing it meets modern standards. Those who are interested in modernising and developing older property can also reap rewards if they find the right opportunity in the right location.Lease or freehold? – Income influencedFreehold properties provide the benefit of a more static cost base whereas a leasehold may have some variability in terms of ground rent charge. Depending on the length of any remaining lease period there may also be the legal cost of re-negotiating a new lease. However if the area that drives the best yield percentage is in a built up area such as a city centre, it may well be likely that your investment needs to be a leasehold as there is no freehold availability. In that event the extra rental income achievable needs to be weighed against the risks and extra costs of the lease status. Freehold obviously suffers in this event as it may limit availability of property to invest in. If a balance of income and capital growth is of interest then this choice may become more of an important factor.Lease or freehold? – Capital growth influencedLease costs need to be considered over the investment holding period and factored into the risk position. Outside of that the position of lease or freehold is more likely to take a back seat based on the location you choose to buy your property in. If the property is targeted to grow in value then the status of lease or freehold is less likely to impact it’s sales value.Serviced Apartments? – Income influencedApartments should be approached with care by income driven investors. There are several potential ongoing costs that need to be evaluated. Service charges, management charges, insurances and ground rents are the main ones to watch for. These costs can be significant and to some extent outside of your control, often subject to above inflation increases. These charges also greatly impact your bottom line should the property ever be empty for any period of time which adds additional pressure to avoid voids and may restrict your ability to command optimum rents. Using a local letting agent may help you to mitigate and manage that pressure somewhat. Overall before investing in apartments it’s highly recommended to check that the rental potential more than justifies the risks in terms of cost inflation and losses in void periods.Serviced Apartments? – Capital growth influencedWhilst operating cost is generally a lesser priority than for the income investor, here the costs can contribute to the holding period of your investment. If you are looking to invest in an area which may take time to develop and show potential then having increasing costs may cause difficulty and stress the ability to manage the investment effectively. Particularly where an investment is highly speculative and potential tenants are not always guaranteed. The capital investor in this case should have a gameplan to avoid tenant voids at all costs and have a more concise understanding in terms of their exit strategy and timing.Overall location plays the most important role for both the income and capital investor. But what’s also clear is that additionally the investor needs to understand their risk exposure, the length of time they plan for their investment and also the costs involved. To know the costs both for sustaining and maintaining their investment whether they be orientated towards income growth or capital growth.
4 Considerations to Help You Choose the Right Investment Property for Income or Capital Growth
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