In this blog, investment consultancy Thirlmere Deacon considers the pros and cons of investing in rental properties.
Investing in rental properties can be a lucrative financial opportunity for many people. However, it is important to weigh the pros and cons before making any decisions.
The Pros of Investing in Rental Properties
The pros of investing in rental properties are clear for most to see with the benefits for investors largely being financial gain.
1. Steady income
Investing in rental properties can provide a steady stream of income and build a long-term source of additional, passive income.
This can be particularly beneficial for those looking for a reliable income to supplement their existing salary or retirement income.
Many landlords are currently capitalising on the increased rents, with rental prices having experienced double digit growth during 2022.
2. Build capital wealth
In locations with strong economies and growing populations, real estate value tends to appreciate significantly over time. For example, average house prices grew by over 70% between 2011 and 2021, in both Manchester and Salford.
Not only does this mean that the value of the property could increase, providing an opportunity for the investor to sell the property for a profit.
Alternatively, investors can hold the investment but extract increased capital value to invest in further properties.
Additionally, the property can potentially be used as collateral for future investments or loans.
3. Diversify your investment portfolio
Rental properties can diversify an investment portfolio in a few ways:
- Asset Class Diversification: Real estate is an asset class that behaves differently from stocks, bonds, and other traditional investments, which can help reduce overall portfolio risk and create new and different opportunities.
- Cash Flow Diversification: Rental properties can provide a steady stream of rental income, which can diversify your portfolio’s cash flow. This is especially beneficial if you have a portfolio that relies heavily on dividend income from stocks or interest income from bonds.
- Inflation Hedge: Rental properties offer a way that can provide a hedge against inflation. As inflation rises, so do rental prices, which can help protect your investment returns.
The Cons of Investing in Rental Properties
Whilst property investment can be lucrative financially there are some drawbacks. These are the cons of investing in rental properties:
1. Upfront costs
Investing in rental properties involves upfront costs.
In the UK, investors can usually take advantage of lending facilities by securing a buy-to-let mortgage which would require around 25% of the total value of the property.
Not only does this reduce the upfront cost of purchasing rental property but it also significantly boosts the potential Return on Investment (ROI).
Whilst an investor will only need to commit around 25% of the property price, they will make a financial gain on the entirety of the property value.
There are other upfront costs associated with buying property such as solicitor fees and property taxes that an investor should consider.
Another factor to consider when looking at upfront costs when investing in rental property is any expense needed to improve the condition of a property – to avoid this additional upfront cost Thirlmere Deacon recommends that investors secure property off plan or newly built.
Owning a rental property can be a time-consuming endeavour, it requires effort to manage tenants, handle repairs and maintenance, and keep up with property taxes and other expenses.
This can be especially challenging for investors who have full-time jobs or other commitments that limit their availability.
The good news is that investors can employ other professionals to take care of your rental property and associated tasks.
A reputable property management company can assist with overseeing tenancies and maintenance for long-term rental properties and manage guests and upkeep for short-term let properties.
Working with an accountant with are expertise can ensure your property holdings are as efficient as possible.
3. Lack of liquidity
Property investment is considered illiquid because it can take a significant amount of time to sell a property and convert it into cash without affecting its market price.
Unlike stocks or bonds, which can be fairly easily bought or sold on an exchange, selling real estate typically requires finding a buyer, negotiating a price, and completing a transaction.
The pros and cons of investing in rental properties
Overall, investing in rental properties can offer certain advantages, such as rental income and long-term appreciation, and when considered versus other investment classes the housing market has strong merit, such as historically has been a good hedge against inflation.
However, it is also important for investors to carefully consider the potential risks and disadvantages, focusing on where and what type of property to buy can mitigate potential risks.
Conducting thorough research, working with reliable property investment advisors, and developing a sound investment strategy can help mitigate some of these risks and increase the chances of success.
To explore the possibility of investing in rental property, contact Thirlmere Deacon.