90% of property is a poor investment

This statement always comes as a bit of a shock to property investors but when you think about it what I am saying is blindingly obvious.

First the good news.

Anyone who ever bought property in the UK, and managed to hang on to it long enough to survive the bad times, has made a pretty penny - or two.

The U.K. has more millionaires now that at any other time. In fact the number of millionaires in this country has doubled in the last four years alone, and that is under a left-wing government.

So much for socialism.

And the reason for this change is primarily due to increases in property prices. So clearly most property has done well, has it not?

So we think property is a good thing, don’t we?

If our offspring asked us whether they should continue to rent or buy a place of their own it is almost certain that we would recommend they buy, providing they can afford it.

If we would recommend such a thing to the people we love most, then clearly we believe in property as a great investment.

Now the bad news.

Although most property has gone up in value most of the time, much of the housing stock in the UK falls into one (or more) of the following categories:

It is old and high maintenance.
It has poor insulation, inefficient heating systems and costs a bomb to run.
It is not near to local facilities, shops or restaurants.
It is not near to public transport routes.
It lacks most of the hi-tech features that we have come to expect over the last ten years.
Built typically 50 years ago it is not fit for purpose in 2008. Look at the bathrooms and kitchens. Then look at the general layout.

This doesn't mean it won't go up in value though – it just means that property that does not fall into the above 6 categories is going to be a far better investment simply because more people would want to rent or buy it.

I accept that some things you can fix, others you cannot. Sometimes these problems will offer you an opportunity to make money. Other times they will simply limit the potential of your investment. This is 2008 and people expect a lot more than they ever did 50 years ago. Your property investment will either exploit this or be a victim of it.

When you read that property prices have gone up, say, 10 per cent in a year, this is of course an average figure. Some properties haven't gone up at all. Some have gone up 20 per cent. You want the ones that go up 20 per cent, not the ones that are average, or worse than average. Did you buy it because it seemed relatively cheap? There is always a reason for a property appearing to be cheap.

That is why I believe that ninety per cent of property is unsuitable for investment purposes. They are high maintenance, poorly located, and badly designed. These are purchase decisions of the heart, not the head. They are bought by people who pay top dollar (see “the house you live in is a bad investment) and are loved and cherished by the people who live there – but that does not mean it is the best place for your money.

Will the 90 per cent of property that I sneer at go up in value?

It almost certainly will!

Will it go up in value more or less than property that satisfies the criteria I have just outlined?

Almost certainly less!

That is why as an investor you must limit your choice to that property that has the most potential to achieve the highest returns.

Often it will be more expensive – the question you have to ask yourself is whether it offers the best potential.