To understand whether traditional savings or investing in property will be a better option for you, it's important to know the core differences between what these two types of savings are. Saving money means gradually putting money aside, usually in a high interest savings account for a "rainy day"; whereas investing is the allocation of money to particular commodities such as oil, stocks, or property, with the aim of making it grow. While investing is the riskier way of saving, it can reap greater rewards, particularly if you do your homework on what you want to invest in. Property investment is one of the most popular (and safe) investments on the market.
"Savings alone cannot constitute the increase in wealth, because it can only accumulate funds. There must be the mobilisation of savings, i.e. to put the savings into productive uses" (Wall Street Mojo). There are a number of ways you can utilise your savings, whether that's by traditional savings routes, or investment. Property investment is one of the most popular types of investment routes, and as with all investment carries risks but also returns; whereas traditional savings routes don't carry risks, but often carry little returns (especially with such low levels of interest paid on savings accounts currently).
With the best ISA rates in the UK barely reaching above 2% (unless a specialist savings account), it comes as no surprise that recent reports from the Bank of England stated that more people are dipping into their savings than any other year since the 1970s. The reports have also shown that the interest rate given from most ISAs is dramatically below the rises in the cost of living across the UK (The Independent).
Looking at a £100,000 pot as an example, we can look at a comparison in how your money will grow over the next 10 years (*all figures are based on current trends and do not take into account value changes to rent, void periods and changes to interest rates):
With a £100,000 pot put into a savings account with an average annual interest of 1%, your £100,000 will be worth £110,462 in 10 years.
Buy-to-let Property Investment
Purchasing a house with £100,000 cash that offers a 5% net annual yield with £600 assured monthly rent (with £100 monthly costs) that increases in value by 20% in 10 years will be worth (including rental profit): £100,000 + £20,000 + £60,000 = £180,000.
Mark Harris, a representative of SPF Private Clients, a mortgage broker in Manchester, told The Independent earlier this year, "Buy-to-let can generate a healthy income as well as a capital appreciation over time, with only a relatively modest investment required because you can use a mortgage to gear up... Rates on buy-to-let mortgage deals have fallen, with a wide range of deals available. Rates are higher than on residential deals and you will have to put down a 25% deposit to access the best rates".
Many people have the belief that to invest in property you have to have a large pit of savings already, however this isn't the case. There are a number of developments across the UK that offer low purchase prices, mortgage options and other opportunities to purchase without putting in 100% cash. There are many levels at which you can enter the property investment market. If you're familiar with property investment and have the residual income to purchase, you could enjoy great capital gains or rental returns from your investment, rather than just interest. If you don't have the funds to start investing in property yourself, you can join up with other buyers, look into purchasing with a property fund, or buy shares in a Real Estate Investment Trust (REIT). Investing in property isn't just a way to save money, but can also be a professional career if you're willing to dedicate enough time to it (Simple. Thrifty. Living).
A REIT is a great vehicle for those with little experience in the property investment industry, or for those who want to invest in a variety of different types of property - residential, commercial, hotels, student accommodation, etc. "One big advantage of REITs is that they are a liquid way to invest in real estate; you can benefit from the appreciation of property values, while being able to sell your shares anytime you choose" (Simple. Thrifty. Living).
In recent decades, property values have skyrocketed, and despite Brexit affecting house prices in London, prices elsewhere in the country have continues to grow on a strong positive incline. Property investors who started their portfolios in the 80s or 90s are now seeing their portfolios of a couple of hundred thousand now being worth millions of pounds - a figure that is enticing to new investors. However, it's important to understand that the rate at which house prices are increasing isn't at the same rates as previously, so while a profit can be made, it won't be at the scale that more experienced investors have previously got. This shouldn't deter new investors from building a portfolio, though. As Which? mentions, investing in the right locations can still bring in impressive yields and profits compared to traditional savings routes.
Property has traditionally been a safe form of investment; however new approaches are needed due to Brexit and new tax rules. This doesn't make property investment any less of an attractive or lucrative an opportunity, but does require investors to look at their opportunities and portfolio in a different way. This may be by looking into different locations for investment opportunities - many investors have been moving north to cities such as Manchester and Liverpool over London. Or, looking into adding different types of property to your portfolio - co-working spaces, student housing or care home units are growing in popularity. "These types of properties often have high yields and many bypass tax reforms because they're either classes as commercial properties or have lower values (What Investment).
Ray Withers, Director of Global Edge and CEO of Property Frontiers, told The Express, "A combination of both property and savings is best - don't put all your eggs in one basket! Property is an excellent way to diversify for those who have doubts about the future of pensions, which is under pressure from our ageing population. Rental income behaves much like an annuity, though with slightly more hassle. And making well thought out calculations about when you might need to release equity is paramount. But I would never recommend putting your entire retirement savings into one single property: either combine it with a pension or spread your risk across a portfolio of locations and asset classes".