Wealth Check: 'I want my future to lie in property investment'

Robert Shaw, from Swindon, is a university student on a year's placement as a customer support analyst for IBM.

He plans to buy his first property and pay off the mortgage within the next five years, but he is unsure whether a mortgage lender would be willing to subsidise such a project.

"My main financial goal is to secure my money for the future, and I believe that my future lies in property investment," he says.

"However, I don't know if I am eligible for support from the banks. I don't see why I wouldn't be: I have a good credit history, having never borrowed before."

Robert is passionate about IT, and takes pride in his work, but he acknowledges that the industry can be fickle.

"Modern technology is continually progressing, and at a very fast rate. This means that you constantly have to be on the ball and willing to retrain in order to keep up," he says.

"So I intend to retire at about 45 and focus on my property portfolio, but I aim to start on that sooner rather than later."

He is not afraid to take financial risks: "I have fallen flat on my face countless times, but have always gained something from the experience. I believe that if a risk is worth taking and you have the confidence and passion to see it through, then you have to do it."

Case notes

Annual Income: £17,000
Savings: £7,000
Expected inheritance: £45,000
Pension: None

Offering advice this week are Lorreine Kennedy, of Care Matters, Danny Cox of Hargreaves Lansdown, and Diane Weitz of Ashlea Financial Planning...

Buy-to-let mortgages

The mortgage market currently remains very tight, warns Cox. "In addition to Robert's general creditworthiness, lenders will assess the rental potential of the property as well as the general condition. Evidence is often required as to the rental potential," he says. "Lenders will assess whether the rent will be sufficient to pay the loan, and often require further security from the borrower."

Robert should speak with a specialist in the buy-to-let market, adds Weitz. "Alexander Hall has a very helpful website with lots of good advice about what should be considered in this market, including a calculator indicating what rent can be expected from property of a given value."

In short, to get a buy-to-let mortgage, the site suggests you need to be at least 25, already have had a mortgage, be buying a property in good condition, and have an income of at least £35,000, which may rule Robert out at present on several criteria. However, waiting and getting a bit more financial experience may stand Robert in good stead.

"Property investments are generally geared; meaning money is borrowed to invest," explains Cox. "When the market goes up, this gearing works positively, since Robert would be able to achieve a greater market exposure and therefore greater profits than if he hadn't borrowed. However, when the market falls, this gearing works against Robert and his losses are increased."

Early retirement and financial goals

The advisers agree that property can be a good long-term investment towards retirement, but Cox has some misgivings.

"Property is an illiquid asset, meaning it cannot be bought and sold quickly and easily. This creates problems for investors wanting or needing to sell," he says. "If Robert hopes to build a retirement fund through property investment, it is good to acknowledge that, as with any other investment; property will rise and fall in value, making investments such as these very unpredictable in terms of revenue."

For example, between August 2007 and May 2009, the Halifax house price index recorded an average fall in values of 22 per cent.

"The current average property price in Swindon is around £180,000," points out Kennedy, "so Robert would require at least £40,000 each time he purchases, to cover the cost of a deposit and the legal applications.

"Aside from the potential revenue accumulated from property ownership, if Robert does achieve his goal to work with IBM, then it is quite likely that he will be able to join their company pension scheme, which can be a wise move," she adds.

Savings and protection

"Although Robert is earning for this year, next year he will be back at university with no earnings, so he should save as much as possible this year," says Weitz. "Putting all of his savings into property would not be a good idea.

"The growth in the capital value of property over the last few years was fuelled by easily obtained credit, which contributed to the credit crunch. Right now, it is possible that property prices could fall further," she warns.

"My advice for Robert would be to perhaps save for a little while longer, use cash ISAs to build a larger deposit and then consider buying a property," suggests Cox.

"Robert's outgoings are very low at present, and this year with IBM will be a perfect time to build upon his savings," adds Kennedy. "Setting and reviewing his income and expenses annually is a good habit to get into, and will ensure that he gets the right balance between enjoying life now and having to secure a future."

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