When it comes to gold vs property, many investors might be surprised at the results. Rental properties have long been touted as a go-to asset for large investments. As a physical asset of high value, and providing ongoing income for as long as you own it, property seems like a winning choice. The reality, however, is that recent changes in legislation have significantly reduced the potential returns a buy-to-let property offers. Another factor to consider - one that is often underestimated by many investors looking to become landlords - is the stress involved in managing one or more properties. With mismanagement, your investment in property could turn into a stressful nightmare - one that could even result in a loss.
Purchasing a rental property
A major hurdle to any property investment is the initial outlay. As of January 2024, the average house price in the UK is £284,950 – a significant amount of money even for a large investor. Unless you already have the capital available, you’ll need to borrow the money. A typical residential mortgage can be expensive at high interest rates, but a buy-to-let mortgage (a requirement when raising funds for rental properties) is even more so. The higher risk of buying a property for renting means tougher, and more expensive, restrictions are placed on them.
Buy-to-Let mortgages also require larger deposits; typically, this is around 25%, but can be higher. In our example “average house” this means a £71,237 deposit. Interest rates are also usually higher, but this may be offset by the higher deposit, which results in a lower loan-to-value ratio. Given the long time-frame for mortgages, interest rates are an important factor to consider. If rates increase, this will impact your repayments, and reduce your overall return. Taking on debt is always questionable for any investor, and increases the risk significantly.
The price of the house will not be the only cost when purchasing a property. Legal fees, estate agent fees, and surveys will add to your costs. Stamp Duty will also be a factor when purchasing a second property, and using our example “average house” this means a Stamp Duty of £10,296 - a significant loss to the start of your investment.
Once you have bought the property there will likely be one further cost: refurbishment. Most tenants when renting a property will expect a high quality of finish to the property. Even if all the building work is of sound quality, decorating and refitting kitchens and bathrooms can add thousands more to your costs. What seemed like a £285,000 house could easily cost you in excess of £300,000 – and by the time you finish paying off the mortgage, interest means this may be more than £350,000.
Ongoing costs
Having bought the property and found a tenant, it’s tempting to imagine the job is done. You can simply sit back and enjoy a steady rental income, right? A rental income of £1000 pcm, and a mortgage payment of £800 pcm, would suggest a yield of £200 a month, but the reality is a number of small, hidden costs, can see this income squeezed further, or even result in a loss.
Property management is seen by some landlords as an interesting challenge, but for many the continual effort of collecting rent, performing inspections, and dealing with the issues that regularly crop up, is an unwanted hassle.
Unforeseen issues with the property, or troublesome tenants, could easily add to your costs. Landlord insurance is a smart way to protect yourself against these issues, but isn’t compulsory. As with all insurance, it’s a personal choice of whether you risk having it and not needing it, or needing it and not having it.
Investors who do prefer a hands-off approach can employ a property manager, who will see to the more mundane issues that may occur, but it will cost you more of your investment. Letting agents carrying out full property management services typically charge around 15% of rent collected – £150 of your monthly income in our example.
As time goes by the property will need refurbishment, and the general rule is to refresh the décor every ten years; keeping it fresh, clean, and (relatively) stylish to entice lodgers. On top of the cost incurred in doing this, every month that your property sits empty is a month of no earnings, despite potentially paying a mortgage, insurance, and agent fees.
This same risk for loss of earnings also applies to tenants. Whenever a tenant leaves, there will be time in which the property remains empty, and the longer it takes to find a new tenant the more it costs.
Tax on rental income
Rental income is taxable in the same way as income earned through employment, and the two are combined when calculating your income tax bill each year. If you collect £1000 a month for a full tax year this will equate to an extra £12,000 income earned. If this were to push you into a higher tax bracket this will impact all your earnings, and should be carefully considered by any investor.
Landlords used to enjoy a certain amount of tax relief that somewhat countered this risk. Since April 2017 however, this tax relief has been reduced, and was phased out by 2020. This meant that by 2020 tax bills on rental income increased significantly – dependent on income earned and your tax bracket.
Selling the property
When you decide to sell your property - whether because of high prices or you wish to release your equity - you will be faced with further costs. Estate agents and legal fees will once again reduce your profits, and further work may be required to bring the property to modern standards.
One of the biggest costs you will likely incur will be Capital Gains Tax (CGT); a tax paid on the profits made from the sale of assets. Full information on CGT can be found on the government’s official website, but for landlords especially CGT could cause a significant loss in profits.
For the financial year of 2023/24the CGT allowance is £6,000. This means that if you sold your property and made £50,000 profit, £44,000 of this would be eligible for taxation. This is done at a rate between 10% and 28%, which could see your profits reduced by a significant amount.
House Prices
One of the biggest risks in investment properties are house prices. High demand has helped keep house prices high in the past decade, but higher interest rates in 2022 and 2023 have seen prices stagnate, and even fall in some cases. It remains unclear how much higher house prices can climb given they have far outpaced wages, but a lack of significant new builds could help keep prices higher. As with any investment there is always the risk of your asset losing value, a risk that needs to be considered by any buyer.
Gold as an investment alternative
Gold offers a number of advantages over property as an investment vehicle.
-
Gold is significantly easier to invest in; you create an account, purchase your gold, and it’s posted to your door. All the stress of dealing with estate agents, builders and tenants, is eliminated. You store your gold away and sell it when you feel the time is right.
-
Gold is much more flexible as an asset. Gold bars start from prices as low as £60 – at the time of writing – and can scale up as high as you’d like. Gold bars and coins can also be sold as you wish, if you have ten bars and want to sell half your investment then this can be done easily. Raising capital from a house is much more complicated, and you can’t sell half your property in most circumstances.
-
Gold is a safe-haven asset. Unlike the housing market, gold does not follow traditional economic trends, and historically has correlated negatively. This means while house prices are falling, gold will likely be performing even better than normal.
- Gold coins are tax-free. Thanks to their status as investment gold, and legal UK tender, gold coins are exempt from both VAT and CGT. This means your money goes much further and can be fully committed to your gold investment.
Disclaimer: We cannot offer personal investment or tax advice. This guide aims to offer a useful source of information and opinions to assist people in making their own informed decisions. If you do require detailed tax and investment advice, you should seek your own independent advice from an appropriately qualified adviser.
