Is it a good idea to invest in property?

Why is investing in housing an attractive option for some people?

Many people consider investing in rental property when they have money to spare, and wonder whether it makes sense to buy a property in addition to their main residence. This raises a number of questions: how much should you invest in property? Is now the right time to buy?

In France, buying a home is a very common investment: in the first half of 2021, for example, 30.5% of home purchases were for rental investment, according to a half-yearly report by the Century 21 agency. This analysis highlights the growing attractiveness of investment in rental housing, which is being favoured by the boom in this type of housing solution among young people.

Buying a second home can be a good way of building up your assets, and a serious option for people looking for long-term financial security, but there are a number of obligations, disadvantages and risks involved. In this article we will look at the pros and cons of investing in brick and mortar, as it is popularly known, and learn about alternatives to participate in the growth of the real estate market, such as investing in real estate ETFs.

Advantages and disadvantages of buying a home for investment purposes

Home ownership offers a number of advantages, such as passive income and capital gains. Let’s go through them below.

Passive income

Once you have purchased a home, passive income can be generated, for example in the form of rent. This passive income has the additional advantage of being predictable, which allows investors to plan their finances more effectively.

Capital gain

A property can increase in value over time, generating a capital gain: a positive difference between the price at which we acquired the property and its current price. However, the value of property can also fall: for example, house prices in France have been falling for a year (-4.6% year-on-year in the second quarter of 2024).

What's more, buying a flat to rent has other disadvantages. In particular, the need for substantial savings to cover the initial purchase or the inherent risks in this type of investment.

Requires a significant budget

Investing in property involves buying a property. How do I buy a flat? The property is usually acquired by taking out a loan and making a down payment (at least 10%, but more often around 20% of the value of the property). Under the Finance Act 2024, more advantageous loan conditions may be available in certain areas. This is a transaction that requires considerable savings as well as a stable regular income. In addition, the costs of maintaining the second home must be taken into account. These include service fees, council tax, maintenance and repair costs, utilities such as water and electricity, insurance, and the loan itself.

Risks

Both buying and selling a property, and renting it out for investment purposes are operations that involve risks, for example, those arising from possible changes in the economic environment or the financial solvency of the owner or their tenants.

Investing in real estate through real estate ETFs

For people who want to take advantage of the growth in the real estate market but don't have the budget or don't want to take the risk, there is a lower-cost alternative without the constraints of buying a property. This involves investing in instruments such as ETFs (exchange traded funds), which offer a transparent and broadly diversified way of investing, and require less capital. Real estate ETFs include among their underlying assets companies engaged in the development and operation of real estate.

In addition to 'traditional' ETFs focused on real estate, there are real estate-related service providers and real estate investment trusts (SCPIs), or listed real estate investment trusts (SIICs), in which you can invest and which are generally involved in various (types of) real estate.

SIICs generate income by managing and holding property assets, which may be traded on the stock exchange. These are further classified into several subtypes. This type of investment allows the possibility of generating income through real estate, but without having to buy, manage or finance it. SIICs are owners or lessors of property of all kinds (flats, hotels, offices, warehouses, etc.). By investing in an SIIC, you invest indirectly in the property assets held by the fund. SIICs pay you dividends or you benefit from the increase in share value. One of the conditions for qualifying as an SIIC is the obligation to distribute at least 95% of its rental income and 70% of its capital gains to its shareholders. Either in the form of dividends, or through share buyback. It is also possible to invest in SIICs via ETFs.

Investing in housing can be an option for investors seeking passive income and long-term capital gains. However, it must be considered that this investment requires considerable initial capital and involves risks associated to changes in the real estate market. Alternatives such as real estate ETFs offer access to the real estate market, and a possibility to take advantage of the sector's growth without having to purchase an actual property.