Priced out of London property market. What are my accommodation investment options?
Be radical! (I assume you are not working for a city bank getting paid “city wages” – e.g. you are one of the 99% of people in London or more “normal” income.) House prices and rents in London and anywhere within reasonable commuting distances are now so high that couples in reasonable jobs often have to rent rooms in shared houses (HMOs).   This is due to so many people wishing to live/work in London and there not being enough new homes built.  If you are looking at buying a property to rent out, you need the rent to be about double the interest payments on the mortgage – otherwise you will not be able to afford repairs, or cope when interest rates increase – (you could also get a tax bill that is more the your profit).   Finding such a property is very hard in London, as the prices of homes have gone up a lot more in London then rents have.     There are still some flats where the rent will cover the landlord’s costs, but not many.   (Any landlord that brought more than a few years ago, is making a very nice profit in London, as the rents have gone up a lot since they brought – but are you willing to bet your life on the rents going up even more?) Moving a short distance out of London, does not help much. So look at somewhere like Manchester or Birmingham Real Estate is all local. In the United States, I can show you houses so high the rent on them is less than 1/3% of their value per month, eg. $1M House renting for less than $3500. I can also find 3 unit buildings (for say $200K) that rent for $3000/mo total rents. I might want to live in that house, but buy the triplex to rent out. You need to find what makes sense, and not buy out of impulse.  A house to live in and a house to invest have two different sets of criteria. They may overlap, but if the strict Price/Rent were universal, there would be no variation. If you clarify your goal, the answers will be far more valuable. NB - I live in Surrey and bought my house in January 2014. If you don't have a very social life, it does pay to stay outside London. Places outside London are cheap and you will get a better deal in relation to houses or flats as compared to London. I feel very priced out of the market regarding London mortgages I will strongly question you logic behind this ? Why only London ? Why not live in the commuter belt outside London. Good places to reside, good schools, nice neighbourhood and away from the hustle and bustle of London. Many of my colleagues commute from Cambridge and Oxford daily into Central London and they laugh at people who want to buy a house in London, just for the sake of buying a house. It seems that the housing market is generally in a bubble due to being distorted by the finance market London house market is different from the rest of UK. People from overseas tend to invest in London property market, so it is always inflated. Even the property tax hasn't deterred many. I could look into buying somewhere and renting it out You are trying to join the same people, because of whom you have been put out of the housing market. I strictly question this logic unless your mortgage is less than the rent you pay and what rent you get. Buy a roof over your head first, then think of profiting from property.
It might some but I'd wager it pushes the short-term rental pricing down (like hotels) while pushing the long-term rental and housing market prices up.    If landlords can make way more in short-term rentals they are going to do that and limit the supply of long-term.  The tourism sector may have increased revenue but by what extent I don't know.  I'd wager that exploding rent and housing prices will negate any benefits for most residents and may end up costing them much more.  This is why I think you should only be able to do it on your primary residence.  Unless you want to be regulated like a hotel because if you have short-term rentals that you don't reside in, that is effectively what you are.  Not being regulated the same as a hotel at that point only gives you an unfair loophole advantage to other short-term rentals. I have done something similar to this myself.  What you are suggesting is a sound theory and it works.  The issues are (which is why it's the reason not everyone does it) : The initial cost is great, many people in their 20s or 30s cannot afford their own home, let alone buy second properties.  The time to build up a portfolio is very long term and is best for a pension investment.  it's often not best for diversification - you've heard not putting all your eggs in one basket? With property deposits, you need to put a lot of eggs in to make it work and this can leave you vulnerable. there can be lots of work involved. Renovating is a huge pain and cost and you've already mentioned tennants not paying!  unlike a bank account or bonds/shares etc.  You cannot get to your savings/investments quickly if you need to (or find an opportunity)  But after considering these and deciding the plunge is worth it, I would say go for it, be a good landlord, with good quality property and you'll have a great nest egg.  If you try just one and see how it goes, with population increase, in a safe (respectable) location, the value of the investment should continue to rise (which it doesn't in a bank) and you can expect a 5%+ rental return (very hard to find in cash account!)  Hope it goes well! "TL;DR - go with something like Barry Ritholtz's All Century Portfolio: 20 percent total U.S stock market 5 percent U.S. REITs 5 percent U.S. small cap value 15 percent Pacific equities 15 percent European equities 10 percent U.S. TIPs 10 percent U.S. high yield corp bonds 20 percent U.S. total bond UK property market are absurdly high and will be crashing a lot very soon The price to rent ratio is certainly very high in the UK.    According to this article, it takes 48 years of rent to pay for the same apartment in London.  That sounds like a terrible deal to me.  I have no idea about where prices will go in the future, but I wouldn't voluntarily buy in that market. I'm hesitant to invest in stocks for the fear of losing everything A stock index fund is a collection of stocks.  For example the S&P 500 index fund is a collection of the largest 500 US public companies (Apple, Google, Shell, Ford, etc.).  If you buy the S&P 500 index, the 500 largest US companies would have to go bankrupt for you to ""lose everything"" - there would have to be a zombie apocalypse. He's trying to get me to invest in Gold and Silver (but mostly silver), but I neither know anything about gold or silver, nor know anyone who takes this approach. This is what Jeremy Siegel said about gold in late 2013: ""I’m not enthusiastic about gold because I think gold is priced for either hyperinflation or the end of the world.""  Barry Ritholtz also speaks much wisdom about gold.  In short, don't buy it and stop listening to your friend.   Is buying a property now with the intention of selling it in a couple of years for profit (and repeat until I have substantial amount to invest in something big) a bad idea? If the home price does not appreciate, will this approach save you or lose you money?  In other words, would it be profitable to substitute your rent payment for a mortgage payment?  If not, you will be speculating, not investing.  Here's an articles that discusses the difference between speculating and investing.  I don't recommend speculating." How about a slightly different approach. Invest in a duplex or trip/quadplex. Live in one unit, rent out the rest. Chances are you'll end up either paying nothing in total, or even making money as your tenants pay your bills for you. Depends a lot on your area and your willingness to deal with the crap of tenants, but have a look into it. You'll be surprised what you can buy in your area and the types of people you might end up living with you... "If I buy property when the market is in a downtrend the property loses   value, but I would lose money on rent anyway. So, as long I'm viewing   the property as housing expense I would be ok. This is a bit too rough an analysis.  It all depends on the numbers you plug in.  Let's say you live in the Boston area, and you buy a house during a downtrend at $550k.  Two years later, you need to sell it, and the best you can get is $480k.  You are down $70k and you are also out two years' of property taxes, maintenance, insurance, mortgage interest maybe, etc.  Say that's another $10k a year, so you are down $70k + $20k = $90k.  It's probably more than that, but let's go with it... In those same two years, you could have been living in a fairly nice apartment for $2,000/mo.  In that scenario, you are out $2k * 24 months = $48k--and that's it.  It's a difference of $90k - $48k = $42k in two years.  That's sizable. If I wanted to sell and upgrade to a larger property, the larger   property would also be cheaper in the downtrend. Yes, the general rule is:  if you have to spend your money on a purchase, it's best to buy when things are low, so you maximize your value.   However, if the market is in an uptrend, selling the property would   gain me more than what I paid, but larger houses would also have   increased in price. But it may not scale.  When you jump to a much larger (more expensive) house, you can think of it as buying 1.5 houses.  That extra 0.5 of a house is a new purchase, and if you buy when prices are high (relative to other economic indicators, like salaries and rents), you are not doing as well as when you buy when they are low.   Do both of these scenarios negate the pro/cons of buying in either   market? I don't think so.  I think, in general, buying ""more house"" (either going from an apartment to a house or from a small house to a bigger house) when housing is cheaper is favorable.  Houses are goods like anything else, and when supply is high (after overproduction of them) and demand is low (during bad economic times), deals can be found relative to other times when the opposite applies, or during housing bubbles.   The other point is, as with any trend, you only know the future of the trend...after it passes.  You don't know if you are buying at anything close to the bottom of a trend, though you can certainly see it is lower than it once was.   In terms of practical matters, if you are going to buy when it's up, you hope you sell when it's up, too. This graph of historical inflation-adjusted housing prices is helpful to that point:  let me just say that if I bought in the latest boom, I sure hope I sold during that boom, too!" The Motley Fool suggested a good rule of thumb in one of their articles that may be able to help you determine if the market is overheating. Determine the entire cost of rent for a piece of property. So if rent is $300/month, total cost over a year is $3600. Compare that to the cost of buying a similar piece of property by dividing the property price by the rent per year. So if a similar property is $90,000, the ratio would be $90,000/$3600 = 25. If the ratio is < 20, you should consider buying a place. If its > 20, there's a good chance that the market is overheated. This method is clearly not foolproof, but it helps quantify the irrationality of some individuals who think that buying a place is always better than renting.  Additionally, Alex B helped me with two additional sources of information for this: Real Estate is local, all the articles here refer to the US housing market. Bankrate says purchase price / annual rate in the US has a long term average of 16.0. Fool says Purchase Price/Monthly Rent: 150 is good buy, 200 starts to get expensive This answer is copy pasted from a similar question (not the same so I did not vote to merge) linked here.. "From April 2017 the plan is that there is now also going to be a ""Lifetime ISA"" (in addition to the Help to Buy ISA). Assuming those plans do not change, they government will give 25% after each year until you are 50, and the maximum you can put in per year will be £4000. Catches:  You can only take the money out for certain ""life events"", currently: Buying a house below £450000 anywhere in the country (not just London).  Passing 60 years of age. If you take it out before or for another reason, you lose the government bonus plus 5%, ie. it currently looks like you will be left with 95% of the total of the money you paid in. You cannot use the bonus payments from this one together with bonus payments from a Help to Buy ISA to buy a home. However you can transfer an existing Help to Buy ISA into this one come 2017. While you are not asking about pensions, it is worth mentioning for other readers that while 25% interest per year sounds great, if you use it for pension purposes, consider that this is after tax, so if you pay mostly 20% tax on your income the difference is not that big (and if your employer matches your contributions up to a point, then it may not be worth it). If you pay a significant amount of tax at 40% or higher, then it may not make sense for pension purposes. Tax bands and the ""rates"" on this ISA may change, of course. On the other hand, if you intend to use the money for a house/flat purchase in 2 or more years' time, then it would seem like a good option. For you specifically: This ""only"" covers £4000 per year, ie. not the full amount you talked about, but it is likely a good idea for you to spread things out anyway. That way, if one thing turns out to be not as good as other alternatives it has less impact - it is less likely that all your schemes will turn out to be bad luck. Within the M25 the £450000 limit may restrict you to a small house or flat in 5-10 years time. Again, prices may stall as they seem barely sustainable now. But it is hard to predict (measures like this may help push them upwards :) ).  On the plus side, you could then still use the money for pension although I have a hard time seeing governments not adjusting this sort of account between now and your 60th birthday. Like pension funds, there is an element of luck/gambling involved and I think a good strategy is to spread things if you can." "I agree with Joe Taxpayer that a lot of details are missing to really evaluate it as an investment... for context, I own a few investment properties including a 'small'  10+ unit apartment complex. My answer might be more than you really want/need, (it kind of turned into Real Estate Investing 101), but to be fair you're really asking 3 different questions here: your headline asks ""how effective are Condo/Hotel developments as investments?"" An answer to that is... sometimes, very. These are a way for you-the investor-to get higher rents per sq. ft. as an owner, and for the hotel to limit its risks and access additional development funding. By your description, it sounds like this particular company is taking a substantial cut of rents. I don't know this property segment specifically, but I can give you my insight for longer-term apartment rentals... the numbers are the same at heart. The other two questions you're implying are ""How effective is THIS condo/hotel development?"" and ""Should you buy into it?"" If you have the funds and the financial wherewithal to honestly consider this, then I am sure that you don't need your hand held for the investment pros/cons warnings of the last question.  But let me give you some of my insight as far as the way to evaluate an investment property, and a few other questions you might ask yourself before you make the decision to buy or perhaps to invest somewhere else.  The finance side of real estate can be simple, or complicated. It sounds like you have a good start evaluating it, but here's what I would do: Start with figuring out how much revenue you will actually 'see': Gross Potential Income: 365 days x Average Rent for the Room = GPI (minus) Vacancy... you'll have to figure this out... you'll actually do the math as (Vacancy Rate %) x GPI (equals) Effective Potential Income = EPI Then find out how much you will actually pocket at the end of the day as operating income: Take EPI (minus) Operating expenses ... Utilities ... Maintenace ... HOA ... Marketing if you do this yourself (minus) Management Expenses ... 40% of EPI ... any other 'fees' they may charge if you manage it yourself. ... Extra tax help? (minus) Debt Service ... Mortgage payment ... include Insurances (property, PMI, etc) == Net Operating Income (NOI) Now NOI (minus) Taxes == Net Income Net Income (add back) Depreciation (add back) sometimes Mortgage Interest == After-tax Cash Flows There are two ""quickie"" numbers real estate investors can spout off. One is the NOI, the other is the Cap Rate.  In order to answer ""How effective is THIS development?"" you'll have to run the numbers yourself and decide. The NOI will be based on any assumptions you choose to make for vacancy rates, actual revenue from hotel room bookings, etc. But it will show you how much you should bring in before taxes each year. If you divide the NOI by the asking price of your unit (and then multiply by 100), you'll get the ""Cap Rate"". This is a rough estimate of the rate of return you can expect for your unit... if you buy in.  If you come back and say ""well I found out it has a XX% cap rate"", we won't really be qualified to help you out. Well established mega investment properties (think shopping centers, office buildings, etc.) can be as low as 3-5 cap rates, and as high as 10-12. The more risky the property, the higher your return should be. But if it's something you like, and the chance to make a 6% return feels right, then that's your choice. Or if you have something like a 15% cap rate... that's not necessarily outstanding given the level of risk (uncertain vacancies) involved in a hotel.  Some other questions you should ask yourself include:  How much competition is there in the area for short-term lodging? This could drive vacancies up or down... and rents up or down as well How 'liquid' will the property (room) be as an asset? If you can just break even on operating expense, then it might still make sense as an investment if you think that it might appreciate in value AND you would be able to sell the unit to someone else.  How much experience does this property management company have... (a) in general, (b) running hotels, and (c) running these kinds of condo-hotel combination projects? I would be especially interested in what exactly you're getting in return for paying them 40% of every booking. Seasonality? This will play into Joe Taxpayer's question about Vacancy Rates. Your profile says you're from TX... which hints that you probably aren't looking at a condo on ski slopes or anything, but if you're looking at something that's a spring break-esque destination, then you might still have a great run of high o during March/April/May/June, but be nearly empty during October/November/December.  I hope that helps. There is plenty of room to make a more ""exact"" model of what your cash flows might look like, but that will be based on assumptions and research you're probably not making at this time." The other thing to remember is seasonality.  Just because monthly rent is $900/month doesn't guarantee that you'll bring in $900/month.  Plenty of university towns have peak demand during the months of Aug/Sept when students are moving in, but you have to beg//plead//give discounted rent to keep units full during 'off-season' times.  Assuming vacancy during 3 months/year, your average monthly rent is only $675. ($900 * 9 / 12) This may change the economics of your investment. Surely the yield should be Yield = (Rent - Costs) / Downpayment ? As you want the yield relative to your capital not to the property value. As for the opportunity cost part you could look at the risk free rate of return you could obtain, either through government bonds or bank accounts with some sort of government guarantee (not sure what practical terms are for this in Finland). The management fee is almost 30% of your rent, what does this cover? Is it possible to manage the property yourself, as this would give you a much larger cushion between rent and expenses. This is a bit of an open-ended answer as certain assumptions must be covered. Hope it helps though. My concern is that you have 1 year of university left - is there a chance that this money will be needed to fund this year of uni? And might it be needed for the period between uni and starting your first job? If the answer is 'yes' to either of these, keep any money you have as liquid as possible - ie. cash in an instant access Cash ISA. If the answer is 'no', let's move on... Are you likely to touch this money in the next 5 years? I'm thinking house & flat deposits - whether you rent or buy, cars, etc, etc. If yes, again keep it liquid in a Cash ISA but this time, perhaps look to get a slightly better interest rate by fixing for a 1 year or 2 year at a time. Something like MoneySavingExpert will show you best buy Cash ISAs. If this money is not going to be touched for more than 5 years, then things like bonds and equities come into play. Ultimately your appetite for risk determines your options. If you are uncomfortable with swings in value, then fixed-income products with fixed-term (ie. buy a bond, hold the bond, when the bond finishes, you get your money back plus the yield [interest]) may suit you better than equity-based investments. Equity-based means alot of things - stocks in just one company, an index tracker of a well-known stock market (eg. FTSE100 tracker), actively managed growth funds, passive ETFs of high-dividend stocks... And each of these has different volatility (price swings) and long-term performance - as well as different charges and risks. The only way to understand this is to learn. So that's my ultimate advice. Learn about bonds. Learn about equities. Learn about gilts, corporate bonds, bond funds, index trackers, ETFs, dividends, active v passive management. In the meantime, keep the money in a Cash ISA - where £1 stays £1 plus interest. Once you want to lock the money away into a long-term investment, then you can look at Stocks ISAs to protect the investment against taxation. You may also put just enough into a pension get the company 'match' for contributions. It's not uncommon to split your long-term saving between the two routes. Then come back and ask where to go next... but chances are you'll know yourself by then - because you self-educated. If you want an alternative to the US-based generic advice, check out my Simple Steps concept here (sspf.co.uk/seven-simple-steps) and my free posts on this framework at sspf.co.uk/blog. I also host a free weekly podcast at sspf.co.uk/podcast (also on iTunes, Miro, Mixcloud, and others...) They were designed to offer exactly that kind of guidance to the UK for free. "I think the real answer to your question here is diversification.  You have some fear of having your money in the market, and rightfully so, having all your money in one stock, or even one type of mutual fund is risky as all get out, and you could lose a lot of your money in such a stock-market based undiversified investment.  However, the same logic works in your rental property.  If you lose your tennant, and are unable to find a new one right away, or if you have some very rare problem that insurance doesn't cover, your property could become very much not a ""break even"" investment very quickly.  In reality, there isn't any single investment you can make that has no risk.  Your assets need to be balanced between many different market-investments, that includes bonds, US stocks, European stocks, cash, etc.  Also investing in mutual funds instead of individual stocks greatly reduces your risk. Another thing to consider is the benefits of paying down debt.  While investments have a risk of not performing, if you pay off a loan with interest payments, you definitely will save the money you would have paid in interest.   To be specific, I'd recommend the following plan -" "To be completely honest, I think that a target of 10-15% is very high and if there were an easy way to attain it, everyone would do it. If you want to have such a high return, you'll always have the risk of losing the same amount of money. Option 1 I personally think that you can make the highest return if you invest in real estate, and actively manage your property(s). If you do this well with short term rental and/or Airbnb I think you can make healthy returns BUT it will cost a lot of time and effort which may diminish its appeal. Think about talking to your estate agent to find renters, or always ensuring your AirBnB place is in good nick so you get a high rating and keep getting good customers. If you're looking for ""passive"" income, I don't think this is a good choice. Also make sure you take note of karancan's point of costs. No matter what you plan for, your costs will always be higher than you think. Think about water damage, a tenant that breaks things/doesn't take care of stuff etc. Option 2 I think taking a loan is unnecessarily risky if you're in good financial shape (as it seems), unless you're gonna buy a house with a mortgage and live in it. Option 3 I think your best option is to buy bonds and shares. You can follow karancan's 100 minus your age rule, which seems very reasonable (personally I invest all my money in shares because that's how my father brought me up, but it's really a matter of taste. Both can be risky though bonds are usually safer). I think I should note that you cannot expect a return of 10% or more because, as everyone always says, if there were a way to guarantee it, everyone would do it. You say you don't have any idea how this works so I'd go to my bank and ask them. You probably have access to private banking so that should mean someone will be able to sit you down and talk you through. Also look at other banks that have better rates and/or pretend you're leaving your bank to negotiate a better deal. If I were you I'd invest in blue chips (big international companies listed on the main indeces (DAX, FTSE 100, Dow Jones)), or (passively managed) mutual funds/ETFs that track these indeces. Just remember to diversify by country and industry a bit. Note: i would not buy the vehicles/plans that my bank (no matter what they promise, and they promise a lot) suggest because if you do that then the bank always takes a cut off your money. TlDr, dont expect to make 10-15% on a passive investment and do what a lot of others do: shares and bonds. Also make sure you get a lot of peoples opinions :)" I am also from Malaysia and I just purchase a property around Klang Valley area. Property market is just like share market. You will never know when is the highest peak point and when is the lowest peak point. Yes. Not only you, but everyone of us. What I would say that, just buy according to your need and your financial status.  If you feel that you need a comfortable place to stay rather than renting a room, and buying that property will not burden your financial status too much, why not go for it? The best time to purchase property is perhaps last year when world economic is down turn. But thing is over and can never go back. Since all of us don't have a crystal ball to tell the future, why not just act according to your heart and common sense (Buy according to need) ;) "I assume you've no debt - if you do then pay that off. I'd be tempted to put the money into property.  If you look at property prices over the past 20 years or so, you can see returns can be very good.  I bought a house in 1998 and sold it in 2003 for about 110% of the purchase price.  Disclaimer, past performance is no guarantee of future returns! It's a fairly low risk option, property prices appear to be rising currently and it's always good to get your foot on the housing ladder as quickly as you can as prices can rise to the stage where even those earning quite a good salary cannot afford to buy. Of course you don't have to live in the house, a rental income can be very handy without tying you down too much. There are plenty of places in the UK where £60k will buy you a reasonable property with a rental income of £400-£500, it doens't have to be near where you live currently. Just to put a few more figures in - if you get a house for £50k and rent it for £400 a month (perfectly feasible where I live) then that's very close to a 10% return year on year.  Plus any gains made by the price of the house. The main downside is you won't have easy access to the money and you will have to look after a tenant if you decide to rent it out.  Also if you do buy a property make sure it is in a good state of repair, you don't want to have to pay for a new roof for example in a couple of years time. Ideally you would then sell the house around the time property prices peak and buy another when they bottom out again.  Not easy to judge though! I'd review the Trust Fund against others if you decide to keep it there as 12% over 6 years isn't great, although the stock market has been depressed so it may compare favouribly. Keep some ""rainy day"" money spare if you can."