How could a buy-to-let property affect your investment portfolio?
Owning a buy-to-let (BTL) property can offer you the ability to generate reliable rental income while the value of the property potentially grows over time. But, like any investment, there are some risks that you must carefully consider before you invest.
One of these is the risk of overexposing your wealth to the property sector. Your pension and your stocks and shares portfolio may include property investments. So, neglecting to factor your buy-to-let property into your investment strategy could create an unintentional additional risk factor for you.
Read on to learn more about why a holistic approach to your investments is so important and how your financial planner can help you make the most sensible decisions for your wealth.
Without careful consideration, a buy-to-let property can increase your risk of overexposure to the property sector
While you may view your buy-to-let property as separate from your pension or your investment portfolio, remember that it is still an investment. As such, your rental property can affect the risk profile of your investments. Without careful planning, you could find yourself overexposed to the property sector.
Say you invest in a global index fund as part of your stocks and shares portfolio. Depending on how the fund is balanced, it could include investments in property either in the UK or elsewhere in the world.
Similarly, your pension may include property investments alongside equities, bonds, cash, and other asset classes with a view to diversifying your fund.
If you do not factor in your rental property when balancing your other portfolios, overexposure to the sector could mean that the risk profile of your investments is higher than you realised. If this sector were to experience volatility, fluctuations in the value of shares could affect a greater proportion of your wealth than is sensible for your circumstances.
House prices have fallen in recent months, demonstrating that property is not immune to fluctuations in value
The Office for National Statistics reports that, in the 12 months to December 2023, average house prices fell by 1.4%. This is a less significant fall than the 2.3% decrease recorded in the 12 months to November 2023. The report also shows that house price inflation has fallen significantly since July 2022 when it was recorded at 13.8%.
The following graph shows the 12-month percentage change to house prices across all dwelling types in the UK from January 2006 to December 2023.
Source: Office for National Statistics
As you can see, rates have gone through some significant ups and downs within this time frame. As such, it is vital to take care not to overexpose your wealth to this sector. The most suitable allocation will depend on your circumstances, goals, and appetite for risk.
Your financial planner can help balance your investments so that you can mitigate risk
When curating an investment portfolio, pension fund, and buy-to-let property portfolio, a holistic approach may enable you to make more sensible decisions about your wealth. Diversifying your investments across a range of sectors, asset classes, and locations, can help mitigate risk. So, if one sector underperforms, another may help to boost returns if it outperforms.
The asset quilt below demonstrates how different asset classes have performed over the past 10 years.
Source: J P Morgan
As you can see, no single asset class consistently outperforms or underperforms. So, it can be helpful to invest in a range of asset classes in your portfolio to mitigate the risk of underperformance on your overall portfolio.
When you consult your planner, they will look at how each of your portfolios is invested to identify any potential overexposure, while also assessing your personal attitude to risk. This is usually done using an online questionnaire that enables you to indicate how you might feel about different levels of risk.
This data, alongside your personal goals and your existing financial assets and liabilities, will help your planner to build an investment portfolio that is tailored to you.
It is important to meet with your planner on a regular basis to review your investments. Depending on how they perform, it may be necessary to rebalance your portfolio to ensure it remains within your preferred risk profile. For example, if equities have overperformed, you may find that a greater share of your investments are in this asset class, potentially overexposing your wealth. By rebalancing, your planner ensures that your portfolio remains as effective as possible in helping you achieve your financial goals.
Get in touch
Our team of financial planners can offer advice and guidance about balancing your investments so that you have the greatest opportunity to achieve your long-term goals.
To arrange an initial meeting with no obligation, please contact us at hello@rpgcc.co.uk or call 0203 697 7147 to speak to us. Or you can visit our web chat in the bottom right corner, which we respond to personally during office hours or you can leave a message out of hours.
The RPGCC team is always just a click or call away.
