Besides leverage, the second reason property is a great asset is that it combines two forms of return: long-term capital growth and regular income (rent). Cash gives you income alone (interest); shares can give you capital growth and only sporadic income (dividends).
As discussed in our goal exercise, your property goal might mean that you prioritise income or growth, but both are important. You see, growth is a gamble: even though the average British house price has doubled every nine years, an average is not an average for all. Nine years on from the financial crisis, prices in vibrant cities such as Liverpool and Glasgow are still below their 2008 peak, according to Hometrack’s cities index. Yes, you can do a refurb to add value, but you have little control over your area’s price growth (or lack of it). This is why capital growth should be a long-term target, not something you rely on over a two- or three-year period.
Income, on the other hand, is much more of a sure thing. If you clear £500 in monthly rental profit, that’s £500 dropping into your bank account every month, crunch or no crunch. There could be interest rate rises, gaps between tenants or a big maintenance bill, but you can budget for all that and, in the long run, depend on your £500.
So, if the rent falls short of your mortgage payment and you have to fork out every month, think twice about keeping your property just to gamble on growth. In the giddy years before the crunch, some landlords didn’t even put tenants into their properties – it was less bother to shell out themselves while watching prices soar. As they found out, you’ll face a double whammy if prices drop.
Could you have it all, then – high income and high growth? Probably not, especially if you are talking about a home that you bought to live in, rather than as a cleverly chosen investment. And even cleverly chosen buy-to- lets usually involve a trade-off between income and growth: a stucco-fronted flat in central London is the classic growth buy, but has low rental yields because it’s so expensive in the first place. Meanwhile a run-down terrace in, say, Leeds could rent well despite its low price – which means good income but poor price growth prospects.
The wisest approach is to balance income and growth: rent that not only covers your costs but leaves you with an ample buffer, combined with long-term uplift from gentrification and regeneration in your area. Everything in moderation, as they say.
Growth + income = bliss