There are usually two types of investors in this world, those who like to buy company shares and those that like to buy property. It can be difficult to convince either one of these groups to change their philosophy, but it is always worth examining both options.
Firstly let’s compare initial costs and charges. Unless you really know what you are doing, you will need to pay an initial fee for investment advice, usually 3% but often a lower percentage for larger investment amounts. Initial fund charges are usually very low or none existent these days for many investments. With property investment you will have around £1,000 in legal costs and £200 – £800 in survey costs, then the new 3% stamp duty tax that began in April for purchases of a second or subsequent property.
Looking at ongoing costs, these can vary widely depending on the type of investment you have, but typical costs total around 1% to 2% of the value of the fund each year. With property the costs include repairs, maintenance, insurance and weather you pay somebody to manage it or not, if we assume your time is worth money, that is another cost. As a percentage of your investment this will vary widely depending on the value of the property and can be anywhere between 1% to 3% per year. Both property and investments also have the ongoing cost of tax, but with investments this can be reduced each year by the use of investment ISAs, the same cannot be said for direct property investment.
Next, it is worth comparing the flexibility of the two options. Direct property investment is very illiquid, takes a long time to sell and costs money to sell. Many investments can be withdrawn within a few weeks and have no exit penalties, however this is dependant on the type of investment you choose.
Lastly I will look at the risks. When you buy one property, you are putting all your eggs in one basket, and if it goes wrong it can go very wrong, especially if you have borrowed money on a mortgage to fund it. Most of us have a biased towards thinking property is a safe investment, like the saying goes ‘safe as houses’, however this is not the case. Property is an investment which carries risk, and that risk cannot easily be mitigated. With investments you choose the level of risk you take by selecting the appropriate investments. Then some of the risks can be mitigated by diversifying your portfolio via the use of investment funds.
The key to making your choice should be more about which types of risks and liquidity restrictions you are willing to take, not which option you hope will make you the most money.
Jason Hinde FPFS, Cert SMP – Chartered Financial Planner
6th June 2016
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