So you’re researching property investment, and you feel ready to start your journey. That’s excellent, and beginning your investment portfolio is always exciting! You’ve got the choice between investing in new builds, starting a renovation project, or sourcing property to rent out as a landlord! Still, the question remains, where should you choose to create […]Continue Reading
The Unique Benefits of Property Investment
It seems that more and more these days potential investors are saying exactly the same thing: “Banks are offering me nothing on my money.” Or: “The stock market is all over the place.” Either of these phrases are often followed by: “So is it still worth getting into property?”
So how do you answer that question?
Well first of all, it is imperative to stress that buying a property as an investment vehicle is no different to a stock or other commodity in many respects. Values can, and do, go down as well as up. Governments and legislation change. Social trends change. Each asset class has it’s own unique risks. But property enjoys distinct advantages compared to other traditional investments from an investors perspective. Let me talk about a few below.
It is of tangible value.
A property will always have inherent value because, very simply, people will always need places in which to live. There is currently a much publicised housing shortage in the UK. Supply does not meet demand and, crucially, is not forecast to meet this demand anytime in the near future. Our population is growing and Government targets for housing are not being hit, which will further exaccerbate the problem. Neo-classical Economic theory 101: What happens if the supply of a good or service is limited and the demand goes up? The price goes up! Coincidentally, or not, you may have recently read about the Persimmon Homes boss and his reported £100 million compensation package. By being in a position to acquire finite resources i.e land and providing a product in scarce supply with high demand i.e family homes, then you really are winning. Let’s say by comparison you invest your money in an up and coming energy company. Lets call it Enrox. Said company then goes bust due, perhaps, to poor management or fraudulent practices. Where has your money gone? It’s gone and it isn’t coming back unfortunately. Bricks, mortar and land on the other hand will never be wiped out by an electrical glitch, Russian hackers or a terrible CEO.
Leverage is a wonderful tool when used in the appropriate context. Let’s use some (very) simplified examples to highlight the point. Our friend Gary has £100,000 burning a hole in his pocket and decides to buy a lovely 3 bedroom semi-detached house. He pays for it in cash and the value of the property grows by 3% year on year. After year 1 Garys house is now worth £103,000, a 3% increase. A 3% better return than the bank. Not bad. Gary’s brother, Phil, also has £100,000 but Phil decides to put down a £25,000 deposit on 4 separate properties and to mortgage the remaining £75,000 on each house. Each house grows by 3% at year end so Phil’s portfolio has increased in value by £12,000 from his initial £100,000 investment. His return on his own £100,000 investment is now 12% and he has multiplied his growth by a factor of 4 compared to Gary. £9,000 extra profit from the same starting capital. Simply put, that’s leverage. “But… But… What about Phil’s mortgage costs?” “What about maintenance etc etc!” I hear you all cry. So, allow me to explain further why leveraging in such a fashion can be a profitable strategy.
This is the single biggest factor that allows people to potentially become very wealthy and enjoy huge freedom from property investment. Very few assets allow people to rent them from you for the duration of ownership whilst they appreciate in value, effectively paying it off for you… And then some. Lets take Gary and his brother Phil again. Gary rents his one house at £700pcm giving 8.4% yield (£700 x 12 months, yield defined here as annual rental income as a percentage of purchase price). In this case yield being the same as Return on Investment (ROI being annual return on your actual cash). Decent. Phil on the other hand also charges £700pcm but has 4 interest only mortgages at 3% each making payments of around £187 a month due on each. This totals £748 in mortgage payments. However, Phil received a whopping £2800 a month in rental income (£700pcm x 4 houses) for a nett profit of £2052 per month. That’s almost 3 times what his brother Gary makes and, annualised, gives a return on investment of 24.6%, excluding any capital growth. Those are seriously impressive, yet easily achievable, numbers. On top of that, in time we benefit from two other benefits of property investment…
Whilst never a given over any specific time period there is more than enough empirical evidence (since The Doomsday Book, in fact) to support the fact that property prices will likely, on the whole, continue to rise broadly in line with inflation over the long run. It is unrealistic to expect property values to continue to rise to the point where they perenially outstrip growth in wages so to benefit in real terms it is necessary to be able to spot opportunities to create real capital appreciation. Buying in up and coming areas, spotting a motivated seller and developing property of your own are all ways to achieve this. Again, creating your own value is not something you could do as a shareholder of Coca Cola or Tesco, nor by buying gold or silver.
So we all know property prices will, in all likelihood, go up in time but what about the debt i.e your mortgage? Here’s the beauty. If our man Phil takes his 25 year interest only mortgage of £75,000 then as a result of inflation, historically around 2%, it causes a devaluation in the real value of the debt on your property in time. Assuming inflation of around 2% then, compounded your £75,000 debt at the end of the term is equivalent to only around £45,000 in todays spending power at the end of the term. By my reckoning, assuming inflation of 2% your house is worth over £164,00 at the end of year 25 and you have gained £153,900 of rental profit (rental less mortgage costs) over this period. That’s over £117,900 of profit… On one house! So buy, hold and reap the multiple rewards of compounding.
But what of the downsides? True, they do exist and they are numerous but this is why it is worth contacting the professionals to find property that suits your own circumstances and requirements. Through experience we know how to mitigate the risk and how to manage a property that offers very solid returns and very little hassle to you, the investor, whatever the market conditions.
So, in a nutshell property is a tangible, reliable asset that will typically appreciate in value, provide a steady income stream and can be highly leveraged if required to give outstanding returns. Add in the compounding of increasing prices, reducing debt and the rental income and there are few investments to compare as a long term wealth generation strategy.
Please let me know if there are any areas you would welcome any further clarity on and I will respond as soon as I am able. Thanks for reading and I look forward to hopefully speaking to many of you in the near future to help you with your property needs.
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