Why Hold Residential Property?
January 5, 2012
A question we are asked at Young Group quite often is:
“Should I hold my residential property investment(s) or should I sell?”
As with many questions I am asked regarding property and investing, I look at it from a personal perspective. I have my own property portfolio, so what is my personal approach? I have said and written many times, my belief is to hold property for the long term. Trading property is one thing, however, much research has shown that the best returns come from holding property. My blog post explored this topic.
Therefore, when you ask the question about whether to hold or sell, you have to also look at what you would do with the sale proceeds after paying Capital Gains Tax (currently 28%). You could:
- Save it – true, but interest returns are low
- Buy equities – well, this is an intangible asset that is volatile and therefore very difficult to forecast
- Pensions – increase your pension pot, you get good tax breaks, however, you only have to read the press to see the scepticism and uncertainty about pensions
- Funds / Trusts – similar to point to above, as they have performed poorly over recent years
- Others – for instance gold or currency – but how knowledgeable are you about them?
Investing in residential property has, in my view, many advantages. One of the main factors is the simplicity in what you are doing. Warren Buffett – the well respected American investor – often talks about investing in products/ services that are a basic need. Well there is no greater basic need that having a roof over your head.
On average, residential property generates a gross yield of 5-6% and a net yield of around 3-4%. Where else can you generate these income returns backed by a tangible asset? Yes, there is a lot of speculation about residential property prices, but good quality, well-located property has performed well in the past (including during the last few years) and with the increased demand for rental property expected to continue, I expect capital prices should be protected. Which of the other investments can you leverage? This in my opinion cannot only assist the returns you receive but also shows the confidence lenders have in residential property as an asset class.
There are not many sectors in the UK that are currently growing. However, there is no debate that rental demand is strong and will continue that way.
So in summary, I will be holding my portfolio, and will only sell if I see a superior property related opportunity.