How Best to Invest: Cash, Stocks or Real Estate?

It has rarely been more challenging to accumulate a return on our investments than it is at the present time. When most governments are looking to stimulate growth, by encouraging spending, whilst at the same time trying desperately to avoid inflation and keep interest rates down, savers seem to come pretty low on the list of priorities. Finding ways of achieving growth to our hard earned savings pot, to enable us to survive on it throughout our retirement, requires a great deal of careful consideration. In this article we look at the three most frequently used mechanisms for savers and examine which, if any, is likely to provide that much needed inflation-beating return.

Cash

Until the credit crunch in the late 1990's, followed swiftly by the recession, which affected in most of the world's economies, investing cash in a bank to derive an income through interest was considered amongst the most effective - and safest - ways of producing a return. The collapse of many major banks revealed the myth that money thus invested was always safe and the rapid reduction in the interest rates available had an equally devastating effect on the notion that investing in a cash savings account produced a reliable and reasonable source of income. The rates of interest now offered by most savings institutions are so low that they are not keeping up with the rate of inflation. This means that, over time, the savings pot will become smaller and smaller, as the interest does not keep parity with the cost of living. Interest rates do not show any sign of increasing in the foreseeable future, so it appears that cash savings accounts are likely to remain a relatively poor means of investing our money. The greatest advantage is that, compared to other vehicles, bank accounts are still considered to be the safest havens for our funds. They do also provide a certainty as to the return that will be achieved, however low it may be.

Stocks and Shares

Probably the investment model that causes the most trepidation to savers is the stock market. Whilst it is undoubtedly the most risky, carrying the possibility of the total loss of an investment, it usually provides the highest rewards. As long as risk is spread evenly and solid, reliable advice is obtained, and an investor is able to ride out some short term losses, investment returns that beat the rate of inflation easily can provide a steady monthly or annual income. With less hassle than investing in the property market, whilst carrying the potential for higher returns than cash savings, but with much more risk, investing in stocks and shares is not to be taken lightly and is most suitable for those who are willing to invest their money over the medium to long term.

Real Estate

In the light of the low return on cash savings and the risk involved in investing in stocks, coupled with the general fall in property prices, many investors decide to put their money into real estate. This type of investment can work in three ways. Firstly, a fast capital return can be sought by developing a run down or derelict property and selling it on at a profit. Secondly, a slower return can be achieved by retaining the property whilst house prices continue to rise to what might be considered the optimum level to sell. Finally, a regular income can be derived by renting the property out to tenants during the period that it is owned. Significant returns can be achieved on real estate but it should be remembered that house prices can fall as well as rise and that house letting can be a frustrating and expensive enterprise if the wrong tenants take up residence. Nevertheless, bricks and mortar are likely to continue to be popular for those who are interested in investing in the property market, particularly in the field of long-term investment.

Summary

Our examination of the three principal means of seeking a return on our capital investments reveals that there is, in fact, no perfect solution to the problem. All savers are different, having different income needs, being willing and/or able to invest varying capital amounts and possessing differing risk indexes. Whether looking to invest in cash savings, real estate or stocks and shares, the clear advice should always be to think carefully about that exactly you would like to achieve with your savings and what degree of inconvenience and risk you are prepared to entertain before selecting your preferred investment model.

Property Price Forecasts by Region in 2014

Understanding what's likely to happen to property prices in the future can be really helpful in knowing whether now is the right time to buy or sell.

How can you use property price forecasts to help you make your decision?

This really depends on whether you are a first time buyer, trading up, down, investing in property, looking at exiting from your investment and whether you are taking out a mortgage or have cash.

What do the forecasts say?

Ideally, property prices would always increase just ahead of inflation. Over time the average inflation is around 3% per annum, but at the moment and for 2014 it looks like inflation will run at around 2%.

In comparison, the forecasts range from 4% in Scotland to 8.4% in London for 2014 and over the next five years, property prices are estimated to rise from 17% in Scotland to 39% in London. Now, although these figures sound enormous, don't forget if inflation runs at 3%, to stand still, property prices over a five year period to keep pace would need to increase by 16%.

So the predictions are that Scotland's property price growth is in line with inflation, and areas such as the North East and West, Yorkshire and Humber and Wales won't grow much more either. So in these areas, although there will be different price changes for different property types in different local postcodes, overall it doesn't matter too much when you buy as prices aren't expected to rise that much.

However, in areas such as the South East and West, East and West Midlands and the East of England and of course London, knowing what prices are likely to be at, at the end of each year, can be helpful in knowing whether it's best to buy now with a 5% deposit or whether it's better to save up for a higher deposit, knowing how much you may need.

Below I've given you some thoughts on how to think through whether it's worth buying now or wait for a while, and from an investor's perspective, how to work out whether it's a good idea to invest in the area you are planning to or not.

First time buyers, should you buy in a rising market?

For anyone looking at buying in areas like London where you've seen a sudden 5-10% increase in prices year on year, it's feels very scary at the moment and better to buy now than in the future.

And to some extent, in areas where you have 7-8% growth in 2014, if an average property price is £200,000 now, in a year's time, these forecasts suggest prices would be around £215,000, so a 5% deposit would increase from £10k to £10.75k. However, if you could save up another £10k so put down a 10% deposit instead, you may get a better mortgage rate so your costs are lower.

On the other hand, if you do buy now and put down a 5% deposit, then your property's value could increase by £15k, allowing you to increase the equity in your property from £10k to £25k, so £25k over £215,000 would give you a 'deposit' of 11.6% and as you are likely to be on a repayment mortgage, the equity may be even more.

But, and it's a big BUT, by 2016 interest rates are likely to start increasing, so it's important to make sure you don't overstretch yourself too much as mortgage rates since 2000 have been as high as 7%, so if you do buy over the coming year or so, then make sure you can afford the mortgage on-going.

Buyers and sellers trading up, is it good to buy in a rising market?

When buying and selling in a market which is rising, it's definitely a good time to sell and trade up sooner rather than later, as long as your job and finances are secure.

For example, if your £150,000 property increases by 7%, then it would be worth £160,500 by the end of 2014. If you then buy a property worth £300,000, then that would cost £321,000. So you'd earn an extra £10,500 on your current home, but then it would cost you an extra £21,000 to buy the new one.

Buyers and sellers trading down, does it matter when you buy if prices are rising?

For anyone looking at trading down, it's important to make sure you move to a property and area which is right for you, especially if you are retiring. Although seaside towns and lovely rural settings may seem great to start with, if you are retiring, making sure you have easy access to public transport, doctors, hospitals and indeed having family and friends close at hand, is incredibly important.

But the good news is if you are trading down, a rising market will help you financially. If you are selling a £350,000 property and hold on to it for a year at a price rise of 8%, then it should be worth £378,000 - if you own your property. In the meantime, if you then buy a property at the end of the year which is worth £200,000 now, if it too increased by 8%, you would have earned £28,000 from your own property, but spend only an extra £16,000 on the property you trade down to.

So from a trading down perspective, buying when you find the right property is more important than worrying about house prices, as long as the area you are buying into rises at the same rate (or less) than the one you are selling in.

What To Do If You Are Thinking of Buy to Let in 2014

If you are thinking about buying your first property to let or expanding your portfolio in 2014, you need to consider the tax implications of adding property to your wealth, then you need to work out the risks and rewards of buy to let investment, and finally, know your exit strategy.

Tax Implications of Adding Property to Your Wealth

You need to know that any property you add to your 'wealth' will be taxed. And the tax you pay won't just be the net income on rent or the capital gains on the property. It may be that the property income or capital gains adds so much to your wealth you end up paying more tax because you lose benefits.

For example, if you earn £50,000 and have kids who receive child benefit, then adding rental income to your property may well mean you lose the benefit. If you earn over £100,000, then the rules on personal tax allowances may mean you end up losing tax relief rather than benefiting from it.

Only a property tax expert can help you, so get started by reading our Buy to Let Tax Checklist.

Risks of Buy to Let

Many people get excited at the thought of buying another property, and there are plenty of newspaper reports around telling you it's a great idea. However, there aren't enough reports explaining the downsides of buy to let, so here's a list to make sure you know what you are up against:-

• Property prices can fall by up to 20% - so make sure you have a back-up plan if this happens.
• Rents can fall by up to 20% too - so make sure you are still cash flow positive in this case.
• You might have a low interest rate of around 2.5 to 3.5% but when interest rates rise, rates are likely to be around 5% long term and could reach 7%.
• Tenants might not pay their rent - have you savings to cover costs if this happens?
• Tenants can cause serious malicious damage to your home - make sure you reference tenants carefully, don't go for cheap options.

To cover yourself from the risks of buy to let, read our Buy to Let Insurance Checklist.

Know that if you invest in a property with a 75% loan to value mortgage, at rates of 5%, properly maintain it, then with the average 5.5% yield, your net income is likely to be zero. This is fine if you are investing for capital growth, but means you need a 7% plus average to secure an income or a lower loan to value such as 50%.

Rewards of Buy to Let

Although there are downsides to buy to let, there are upsides too. Capital growth, on average, is around 4-5% per year in most areas over time, so ideally, you want to buy a property where you can 'force' capital growth through renovation or adding space to give you an immediate uplift in value. In addition, if your rental income is 7% plus, then you are likely to make enough money to cover all your costs and net some extra cash.

For the future, property price increases are expected to be from 4 to 8% for 2014 and the same for 2016, so use these figure to work out what your property investment is likely to deliver over the next couple of years. To make sure you analyse any deals by using our checklists.

Your Exit Strategy

Finally, it's essential NOT to buy a property without knowing when and how you will exit from it. Working out if you need to pay off the mortgage and secure the income by the time you exit or if you want to sell up. In this case, you need to know the right time to sell without incurring a huge tax bill.