The UK property investment landscape is vast and ever changing. With this in mind, developing a comprehensive long-term investment strategy is vital to ensuring long term financial resilience. While this can be done in a number of ways, property investment is seen as one of the most effective ways to achieve this. By providing investors with a tangible and consistent investment, property should be considered as a useful tool for any savvy investor. This article will discuss the impact of property investment on an investor’s long-term financial resilience.
Defining Long-Term Financial Resilience:
In order to understand how property can impact financial resilience, it is important to define financial resilience. With this in mind, financial resilience can be defined as an investor or investment’s ability to withstand market volatility, adjust to changing circumstances and overcome financial challenges. While investors generally look to maximise their returns, financial resilience is also about ensuring that these returns are protected in difficult periods. The measure of an investment’s financial resilience is an important factor to consider for any investor, as it will likely play an important role in the determination of long-term financial returns.
The Appeal of Property as a Resilient Asset
Real estate is generally considered to be a resilient asset type, partly due to its tangible nature and partly due to its relative stability. When compared to more volatile investments such as stocks or derivatives, it delivers more level returns, over a longer time frame. While property returns are determined by a number of different factors, the appeal of property as a resilient asset is generally based on the following factors:
1. Capital Appreciation Over Time
Perhaps the most important factor to consider is the capital appreciation of property. While most property markets are likely to experience short term fluctuations in price and value, there is generally a long-term upwards trend in property prices, leading to a steady capital appreciation over longer investment periods. While the location of the property will likely determine the capital appreciation experienced by the property, there is likely to be a steady increase in the value of the property over time.
2. Consistent Income Stream
Another important factor to consider when analysing property as an investment is its ability to generate a steady, consistent stream of income over time. While not all properties are income generating (ie: your primary residence), investment properties can be rented out to generate a regular, reliable income stream. This income stream can cover the costs associated with owning the property, such as mortgage payments, maintenance and management expenses. In some cases, the rental payment will be enough to cover the required expenses and produce a surplus for the property investor, giving them access to additional funds and reducing their reliance on employment.
3. Inflation Hedge
While there are a number of different asset types that are seen to be an inflation hedge, perhaps the most popular are property and gold. Property values are likely to increase with their rentals, and so, in times of high inflation, rentals and property values are likely to increase in line with the inflation, acting as an inflationary hedge and protecting your investment. While this is not always the case, it is very common for property to be regarded as an effective hedge against inflation.
4. Diversification of Investment Portfolio
Having a sufficiently diversified investment portfolio is one of the best ways to ensure financial resilience. With this in mind, incorporating real estate into your investment portfolio is crucial to ensuring diversification. An adequate diversified portfolio can better withstand volatile environments, especially when the portfolio contains riskier assets such as crypto investments.
5. Leverage Opportunities
Where other investments are generally purchased outright with 100% equity, real estate is unique in that investors are able to use borrowed funds to acquire real estate assets. The result of using leverage is that your overall return on investment is much higher than if no debt was used. It is important to consider which type of finance is best for you before applying for finance. Residential mortgages, Buy-to-let mortgages and bridging loans all have their place in real estate investment, but it can be difficult to determine when to use each type of finance. When used effectively, debt enables borrowers to maximise their investment return, albeit at a higher risk.
Building Resilience Through Strategic Property Investment
While investing in property can contribute to a more resilient portfolio, investors still need to ensure that they are making prudent investment decisions. There are a number of factors to consider when evaluating a property, each of which are equally important:
- Location: The location of the property investment is a crucial determinant in the success of the investment. Investing in an area with strong demand, future growth and good infrastructure is important to ensure the success of your property investment.
- Liquidity: It is important to consider the implications of a property investment on your overall liquidity. Property is generally considered one of the less-liquid assets, taking a long time to sell or purchase.
- Risk: While property as an asset class can contribute to a more diversified investment portfolio, it is important to diversify within your property portfolio. This means investing in different property types in different areas.
- Professional Advice: It is vital to ensure that you are fully informed every step of the way. In order to do this, it is important to consult with industry professionals such as valuers, mortgage advisors and real estate agents.
Conclusion
Investors looking to enhance the resilience of their investment portfolio should ensure that they consider property a viable asset class. Aside from offering consistent returns, stead capital appreciation and diversification, property can be purchased using debt, allowing investors to maximise their return on investment.