People are always looking for ‘the whole package’ in life. With investment, the whole package is ‘total returns’. Achieving this usually requires a mix of investment types to create a balanced portfolio, providing both income and capital gains. Residential property is that rare investment which offers the whole package: a total returns product.
Returns from residential property are driven by two major factors: income and capital movement. However, as Property Partner gives the power of institutions to the individual investor, additional advantages can be seen with each of these factors:
1. Monthly rental income
The rent earned by a property provides an investor with monthly income, though investors must remember the costs that are implied when they consider gross vs net income.
Property Partner always lists net income in the form of ‘dividends’, meaning that investors will receive the whole figure displayed. This takes into account various costs, which include advertising, letting and management fees, as well as provisions for repairs and void periods. Property Partner provides advertising, letting and management at a low institutional rate of 10.5%+VAT of Gross Rental Income, versus around 18% +VAT with many major UK letting agents. Learn more about our fees here.
2. Accruing capital returns
The price of a property changes along with the housing market. If your property increases in value, you should be able to sell for a profit – the same applies to your property investments with Property Partner where you can offer your investment for sale at anytime on the resale market, without any exit fees 1. Remember, though, that property prices can go down as well as up.
With Property Partner, you often have the additional benefit of a purchase price discount to the market value of the property which only serves to accelerate capital growth. As a large cash purchaser we can act in many ways that provide benefits to vendors, which allows us to secure discounts for our investors from the RICS valuation.
Investors must decide how much of their return they would like to see in monthly income, and how long they are willing to accrue capital returns to be realised at the point of exit. It is worth bearing in mind that gearing amplifies the impact of property price movements, meaning that investors’ returns outperform the market if prices rise, and underperform it if they fall.
On the other hand, income from the dividend yield is more reliable, and allows you to reinvest sooner. In addition, gearing can also enhance the dividend yield in certain circumstances.
Building a portfolio of balanced ‘total returns’ is always advisable, and this can be well achieved with property alone. Properties from different areas offer different measures of income and capital returns, so it is simply a matter of investing into the right combination of property types and areas. Roughly two-thirds of total returns are historically seen from capital growth according to data published by the IPD, but this varies by region*. In many areas, particularly those outside of London and other major cities, income yield is typically higher – though capital growth has often been lower historically.
Here are three example properties, each with a different balance between income and capital returns. The table shows how this could accrue over a period of 5 years:
For illustrative purposes, the discount on purchase has been separated from capital returns. Note that Capital returns compound, for example the Total Return in Property A is calculated as [(1+5.5%)^5)-1]+(5*2%)+5%. For prudence, we haven’t factored in the reinvestment of dividends.
Note that none of these figures take into account the amplified effects of gearing on property, or the impact of taxation.
If you’re looking for a balance of monthly income and capital returns, residential property has the rare ability to provide that balance in one investment – it can even offer different balances between the two. Other kinds of investment will usually require greater diversification to balance against each other, for example:
When choosing your property investments, it is worth bearing in mind the balance between monthly income and capital growth across your portfolio, and aligning this to your goals.
If you’d like to see the range of properties currently available on the site, browse the marketplace now.
Capital at risk. The value of your investment can go down as well as up. The Financial Services Compensation Scheme (FSCS) protects the cash held in your Property Partner account, however, the investments that you make through Property Partner are not protected by the FSCS in the event that you do not receive back the amount that you have invested. Past performance is not a reliable indicator of future performance. Forecasts, if stated, are not a reliable indicator of future performance. Interest and capital returned may be lower than expected. Gross rent, dividends, and capital growth may be lower than estimated. 5 yearly exit protection, exit on platform or exit in line with Opportunistic Fund strategy, subject to price and demand. Property Partner does not provide tax or investment advice and any general information is provided to help you make your own informed decisions. Customers are advised to obtain appropriate tax or investment advice where necessary. Financial promotion by London House Exchange Limited (No. 8820870); authorised and regulated by the Financial Conduct Authority (No. 613499). See Key Risks for further information.