Property has, traditionally, been a sound investment vehicle. However, in times of economic uncertainty, rising interest rates, and tougher lending criteria, it’s easy to question whether or not it’s the right move. There’s no doubt that these factors can seriously affect how profitable property investments are. Indeed, if you can’t get a mortgage because the lending criteria are too strict or you’re not willing to pay 6% interest, property isn’t an investment option. The good news is that other options have just as much, if not more long-term potential.
It’s All About Returns
Now, we’re not saying that property can’t be a good investment. It certainly can. Although somewhat speculative, a guide to property yields by NatWest Bank states that an annual rental yield between 6% and 8% is considered “reasonable”. Compare this to the average annual returns of a stock market investment, such as the S&P 500, and 6%-8% is certainly a competitive yield. In fact, we can back this up with data. The ES futures chart for the S&P 500 shows that the index (which tracks the 500 biggest public companies in America) has an all-time yield of 9.15%.
Delving deeper into the figures, a single year of investing in the S&P 500 can return upwards of 15%, while the 5-year yield (2018-2023) is 47.51%. So, while property and the S&P 500 are similar in terms of overall yield potential, the latter is more volatile. This volatility swings both ways, which means single-year returns could be below the 6% benchmark set by property investments. However, returns can also swing the other way and be significantly higher than 8%. Investors also have the opportunity to invest small amounts of capital in the stock market.
Risk vs. Returns: The Eternal Investment Decision
The UK average property costs six figures or more. An investor doesn’t need this money liquid capital to invest thanks to mortgages but, as we’ve said, they can be hard to get. Someone looking to invest in the S&P 500 could do so for less than £100. Of course, the real-term returns on a £100 investment won’t match the money you could make from buying and renting a property. However, in relative terms, the yields would be similar, but the S&P 500 investment would have a much lower risk. This, in many ways, is the factor most investors need to consider. If mortgages are hard to come by and interest rates are excessive, the stock market could be an option.
The amount of capital required is lower and the annual yield is slightly better. However, this does come at the expense of stability. Property investments, by and large, offer more stable returns. The stock market is more volatile. It’s not as volatile as some financial instruments. Trading currencies via forex is notoriously volatile. However, in comparative terms, stocks are slightly more volatile than property. This isn’t a zero sum game. You don’t have to choose one or the other, but it’s important to understand both options so you can pivot and switch when economics dictate. There are, of course, no guaranteed investments. However, if you’re interested in investments and the property market isn’t ripe for harvesting, don’t be afraid to consider the stock market.
