Why invest in buy to let property?

When considering why to invest in buy-to-let property, it makes sense to look at the alternatives. For practical purposes, these are cash and cash equivalents, other tangible and intangible assets, bonds, equities, and other types of property investment.  

All of these may have a place in your portfolio, but buy-to-let property has a unique set of special benefits. Here is a quick guide to how it compares to the other investment classes. 

Cash and cash equivalents 

Cash flow is important to everyone, but cash deposits generally struggle to keep pace with inflation. It’s practically unheard of for cash to outpace inflation. 

Cash equivalents such as cryptocurrency do have the potential for investment gains. The main problem with them is that they can be extremely volatile. Similar comments apply to trading the currency markets. 

These areas, therefore, tend to be a niche interest amongst a very small group of people. The people who succeed here tend to put in a lot of work to become experts at what they do. They may also rely heavily on technology. 

Other tangible and intangible assets 

There has long been a market for tangible assets from commodities to collectables. Over recent years, there has been a growing market for intangible assets such as intellectual property. This market looks like it could be set for significant expansion with the development of new classes such as NFTs (non-fungible tokens). 

These assets do, however, pose several challenges compared to buy-to-let housing. The three main ones are their volatility, their vulnerability, and their security implications. Collecting luxury handbags, for example, is certainly not “as safe as houses”. 

Purchasing other tangible and intangible assets is much more speculative than buy-to-let property investment. As such, these asset classes should generally only form a very small part of your overall portfolio. 

Bonds 

Assuming you go for higher-rated bonds, they tend to be fairly safe investments. At least, you can expect to get back the capital you put in. The main problem with bonds is the same as with regular cash deposits. They struggle to keep pace with inflation let alone get ahead of it. 

Bonds that offer higher yields tend to be riskier. Each situation has to be judged on its own merits. As a rule of thumb, however, the more prepared you are to put your capital at risk, the stronger the argument for choosing the stock market over bonds. 

Equities 

Many investors see equities and buy-to-let property investment as the two key pillars of a balanced investment portfolio. Equities offer liquidity and the chance for both growth and income. 

The key word in that sentence, however, is “chance”. Equities are not usually anywhere near as volatile as some asset classes (e.g., cryptocurrency). On the other hand, they are not as stable as the buy-to-let housing market either. That’s why investors typically aim to have a combination of both (albeit not necessarily an equal one). 

Other types of property investment 

Mark Burns, Director of Pure Investor comments, “Property investment is a broad investment area. Many property investors start out in one area and then branch out into others. Some are quite happy to stay in a single area. Whichever approach you choose (or are thinking of), buy-to-let property is a good place to start and a good place to stay. Here is a quick guide to how it compares with the other main options.”

Property flipping 

If your sole aim is to maximise capital gains, then property flipping may be a better option than buy-to-let property. With that said, at a minimum, it requires vastly more work than buy-to-let property. 

It also benefits from a high level of project-management skills, trade connections and DIY skills (and tools). Property flippers also tend to need plenty of investment capital as it can be very difficult to get financing to refurbish properties. 

In short, therefore, property flipping needs to be approached with extreme care and a lot of resources. Most investors would almost certainly do best to leave it well alone. 

General commercial property 

Prior to COVID19, general commercial property was growing in popularity as a property-investment niche. There were two main drivers behind this. Firstly, it is regulated much more lightly than residential buy-to-let. Secondly, it generally required no work on the investor’s part (beyond initial research). 

Most commercial property investments worked very much like bonds. Investors purchased a share of a commercial property. The property was managed by a third-party company. Investors were guaranteed a certain income for a certain period. After this, they either sold their holding or renewed the contract. 

Post-COVID19, however, the situation has changed somewhat. In general terms, it is still viewed as a good investment area. There are certainly viable opportunities, and the market will recover over time. Right now, however, lifestyle and demographic changes have made the commercial property market less certain than it used to be. 

There is also the fact that people who invest in general commercial property lose out on the benefit of house-price appreciation. That may not be a huge issue when inflation is low. Right now, however, the UK looks set for a period of high inflation. This means that people who own property in their own name could end up substantially better off than those who don’t. 

Holiday lets

Technically, holiday lets are commercial property. In reality, they’re different enough to be viewed as a separate category on their own. Holiday lets have done tremendously well over recent years. They certainly look to have a bright future overall. That future, however, is definitely not without its clouds. 

One of the major clouds is balancing the economic benefits of short-term lets with the need for residential housing. Increasing numbers of local authorities are clamping down on properties being used for short-term lets for this very reason. They can also come up against resistance from neighbours.

Even without these issues, the fact still remains that holiday lets require a lot more work than residential buy-to-lets. They are effectively mini-hotels and need to be run to the same standards. They also require the same level of marketing skills.

Residential buy-to-let, by contrast, typically gives reliable yields with minimal to no effort and little to no marketing. It is therefore a much better option for investors with limited time as well as those who simply prefer a low-maintenance investment.