Risk & Reward – The Fundamentals of Investment

The ability to weigh up risk and reward is a crucial skill for successful investors. Even though investors may be presented with exactly the same information, they may come to completely different conclusions about whether or not it’s a good idea to make the investment. The reason for this is that each investment has to be viewed in the light of an individual’s personal situation and goals and hence an investment which is perfect for one person may be a really bad choice for another. Here are some key questions to ask when deciding whether or not an investment is right for you?

What is my investing horizon? – This is really a better question to ask than the traditional “What is my age?”. You may be a young person who, for whatever reason, can only tie up their money for a short period, or an older person working on the assumption that you may still have decades left to live and even if you don’t, you would like to leave a legacy for your heirs.

How easy would it be to monetise this investment? – Some investments can be monetised fairly quickly and easily, many shares for example, although you do have to accept that you may do so at a loss, particularly if exiting the investment early triggers a penalty and/or a tax liability (such as capital gains tax). Some investments, however, such as property, have much slower transaction times.

How much risk is appropriate for me right now? – In addition to looking at the balance of risk and reward for the particular investment, you need to look at where you stand in general. For example, if the investment is fairly high risk but high reward and all your other investments are very low risk and low reward, then you may feel that you would benefit from taking a bit of a gamble, at least with a small portion of your investment funds, to try to improve your overall return. If, however, you already have a number of high-risk/high-reward investments in your portfolio, then you may be better to stand pat.

How diversified is my portfolio? – Generally, you want to achieve enough diversification so that your portfolio always performs well overall, regardless of the specific economic climate, although some investments may do better than others, depending on market conditions. At the same time, over-diversification can make a portfolio overly complex and challenging to manage.

Does this investment have tax-benefits? – For example, can you put it in an ISA or does it qualify for business relief to help with your estate planning? Tax benefits in and of themselves are unlikely to turn an inappropriate investment into an appropriate one (or vice versa), but when you have the choice between two appropriate investments, remember to take tax into account when calculating which one could offer the better returns.

What is my field of knowledge? – You need to be able to understand potential investments to be able to judge if they are right for you, since, ultimately, control of your financial destiny lies with you and you alone. At the same time, however, the best decision-makers generally know when to get advice, choose their advisers carefully and pay close attention to what they say. With this in mind, it can be worth giving strong consideration to getting professional help from a financial adviser, who can look at your specific situation, make suggestions as to what investments could be right for you personally and explain to you what they mean in actual, practical terms, thus empowering you to make the right decisions for your particular circumstances.

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Investing in Students

While classic comedies like The Young Ones and Rising Damp portrayed students as people who lived in the grottiest accommodation and had living standards to match, the truth is that even then the student world was far more mixed. Today, the ever-increasing number of students going to university obviously creates strong demand in the rental market and there is a need for different grades of property to satisfy different budgets.

The Council Tax Issue

One key point, which sets “student property” apart from the general “young adult” market is that fact that, under current rules, students are exempt from paying council tax. If however, students share a home with working adults, then the household become liable for council tax. For this reason, students can prefer to stick to living with other students. At current time, this feature of the tax landscape seems set to stay in place for the foreseeable future. 

Investing in Student Accommodation Route 1 – Buy to Let

University towns are popular locations for buy-to-let landlords. On the one hand, the reason for this is obvious, lots of students means a ready market for rental property. On the other hand, it also means that there can a lot of competition from other investors. This can push up prices to the extent that rental yield may be significantly lower than would otherwise be expected. If a suitable property can be found, the next step is to fill it. Assuming the property is intended for more than one person, you basically have to choose between letting it out as a complete unit or running it as a share-house/HMO. There is definitely a market for letting out complete properties students, which can share with their friends and this would, in principle, give you the option of making the residents jointly and severally responsible for the rent and any damage to the property. These properties can, however, be harder to fill than standard share houses, particularly since some students (and their parents) may have issues with their potential liability if another party acts irresponsibly. The line between share houses and HMOs is generally decided by the local council, which may impose its own rules on the latter. Landlords may also find that in practical terms they need to be accredited by a recognised scheme before they can target the affluent end of the market, although professional landlords are unlikely to find this a difficult task.

Investing in Student Accommodation Route 2 – Property Development

Those who remember student residences as being places with questionable heating and plumbing will find the current generation of student property developments a far cry from the student halls of their youth. Whereas once halls of residence were built and maintained by universities purely and simply so their students had somewhere to sleep (other than in lecture halls), the current generation of student accommodation is often developed with or by private companies and managed to a very different set of standards. The availability of quality accommodation intended purely for use by students (i.e. protected from competition from working adults and without any issues related to council tax) can be the deciding factor in picking one university over another. Depending on their location, such properties can either be intended for year-round use by students (who may want or need to work during the summer) or do double-duty as short-term lets over the holiday periods, particularly the summer. They are generally the preferred option for first year students new to the area and the university and now many students like to remain in them for continuity and convenience even when they are acclimatised and have made friends.

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