What percentage of your portfolio should be in property?

Justin Urquhart Stewart, Co-founder and Head of Corporate Development

We Brits love a piece of property – just look at the number of shows on the TV about the subject…Channel 4 alone has 13 of them on air. But should we really have them as the foundation of an investment portfolio?

We are a nation that sees owning our own home as our number one financial priority and this has been the case for a long time. At the beginning of the twentieth century, just 23% of the nation owned their own homes while the rest rented. 100 years on and that ratio has reversed – now just 35% rent. And while the media bemoans the fact that fewer of us own homes than 30 years ago, some of us own more than one property for the purposes of investing.

Recent estimates have put the number of private landlords around the two million mark1 – although 93%2 of that number only apparently rent out one property. A large percentage (71%) of landlords3 also think that property investing is preferable to any other form of investment.
The additional burden comes of the back of the change in April 2016 that saw an additional 3% in stamp duty payable on the purchase of any second homes and buy-to-lets.

In April this year, some tax changes announced by George Osbourne in 2016 begin to kick in. Over the next four years, landlords will no longer be able to offset increasing levels of their mortgage interest rate payments (among other costs) against any profits from their properties and so reduce their tax bill. The additional burden comes of the back of the change in April 2016 that saw an additional 3% in stamp duty payable on the purchase of any second homes and buy-to-lets.

So is property still such an attractive proposition?

For many the tangible nature of the investment will clearly still appeal. You can see it, touch it and no-one can walk away with it in their pocket.

The high profile nature of the property market also means that you believe you have a pretty good understanding of how your investment is performing.

Meanwhile, the recent multiple year timeline of property price increases has helped encourage more and more to invest. Many who have invested in property have not seen the value of their property fall…ever.

Last, but not least, there’s a steady stream of income from the rent – a source that is, if the news headlines are to be believed, not set to dry up any time soon. The limited number of new houses being built while our population continues to grow is good for landlords.

For most people though, while owning their own home is important, they will stop there. Even if they are not considering using their property to help them in retirement – by downsizing or through an equity release scheme – they have taken a different approach to investing.

This approach looks to benefit from a diversified portfolio of assets that are spread across the type, geography and even currency in which it’s valued. This diversification means that you won’t have the bulk of your money tied up in assets where a downward trend in prices hits a big percentage of your portfolio, and, in the case of property, will also likely affect the level of your rental income.

You can also add to this the advantages of getting at your cash quickly. Houses now take an average of 10 months to sell and an over allocation to property may mean you have to borrow money (and pay for that privilege) to enable you to do the other things that you want to do.

Meanwhile others are also coming to the conclusion that property also incurs a lot of hidden costs. These typically include:

Mortgage interest payments

Stamp Duty

Building management fees

Refurbishment / decoration

Letting agent fees

Exterior maintenance

Appliance and fittings maintenance

Gaps in rental income

Cleaning costs

Advertising fees

Capital Gains Tax

Loss of Mortgage Interest Tax Relief

Apart from Stamp Duty and Capital Gains Tax, these costs are also fairly likely to occur on a pretty regular basis – all of which eat into that rental income stream.

Time perhaps to rethink that percentage in property and broaden your investment horizons? And especially before the impact of increasing inflation (up to 1.8% in February 2017 from 0.6% in August 2016) feeds into potential action by the Bank of England. Increases in interest rates will have immediate consequences for mortgage rates.

Justin Urquhart Stewart
Co-founder and Head of Corporate Development

Please be aware that the value of investments, including those in property, may go up and down and you may get back less than you originally invested.

1 Paragon; 2 Countrywide; 3 Allsop’s

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