According to the Times Rich list 40% created their wealth through property. The other 60% invested in property as a means of growing and protecting the wealth that they created in other industries. In fact more millionaires attain their wealth through property than any other type of investment.
Why Invest In Property?
Unfortunately most of the population will die poor. Not only are we living longer lives, but the Government is struggling to support us into our retirement. In addition, pension schemes are no longer sufficient. Unless we do something now to look after ourselves in the future then we will probably have to work past the normal retirement age and suffer from a poorer standard of living.
There are basically three things we can do about this.
- Start a new business
- Invest into the stock market
- Invest into property
From our experience, we have found that investing in property is by far the most risk-averse, hands off and financially rewarding option. One of the main reasons is that the UK has always been and will always be a hugely popular place to live. It is just an island with a very stable population. Therefore prices will continue to grow, even though we currently find ourselves in a deflated market (which is actually great for investors).
However, the main reason that investing in property performs so well, is because we can invest using other people’s money, typically in the form of a mortgage or other lending facility. For example, if we had a sum of £50,000 to invest then we could buy £50,000 worth of shares. If they performed well and achieved a growth rate of, say 7% per annum, then after 10 years the value would be £98,358 (say £100,000). This is a 100% return on our investment!
However, if we used the same £50,000 and invested it into property then we could purchase a property that was worth approximately £160,000. As mentioned previously, this is achieved through using a mortgage or other lending facility. Given the current market conditions let’s assume that the property market also increases in value by 7% per annum (even though it increases at a higher rate in normal market conditions). After 10 years the property has increased in value from £160,000 to £314,744 (say £315,000). Our original investment of £50,000 is now worth more than £265,000. That is a return on our investment of over 500%!
However, we must consider that we will have interest to pay in borrowing this money. But the great thing is that this cost will be covered by tenants who will rent the property from us and there will almost certainly be a surplus income which we can spend however we want. Therefore our investment has significantly increased in value over time and it has given us additional income to help improve our lifestyle. The most important thing, is that the property will be tenanted as much of the time as possible. Therefore it should be in areas of high rental demand such as City Centres, close to good transport links, nearby bars, shops and restaurants or close to University’s and office districts.
To put this into real life terms, let’s take a £100,000 property.
A typical yield we look for is 8%, this equates to an annual rental income of £8,000 or £667 per month. The typical deposit needed to buy this property would be 30% which equates to £30,000 (Typical deposit is 25% rarer cases it is 30%). This means that we would need to borrow £70,000. The interest payment on this would typically be around 5% per annum. This equates to £3,500 per annum or £292 per month. Monthly rental income (£667), minus monthly mortgage payment (£292), equals £375. Let’s assume monthly costs of £75 per month. This equates to a net income of £300 per month which we can use how we like. Once we build up a portfolio of say five properties we have an extra monthly income of £1,500. This doesn’t even take into consideration the capital growth discussed earlier or the potential to maximise rental income by looking at Multi Lets or HMO’s (house of multiple occupancy) which can dramatically increase your ROI
Investing in property is both useful and flexible for many reasons. Aside from the obvious financial gains, it can be used to help you achieve specific goals. For example, if you want:
- To earn a higher interest rate than leaving your money to sit in the bank
- To earn a higher interest rate than bonds, ISA’s and other saving schemes
- To build a portfolio that will give you enough income to retire
- To earn more money to improve your lifestyle
- A hands off investment that requires very little of your time
- High yielding returns on capital
- To invest for your children’s future
- A safe and secure investment
It is important that you know what you are trying to achieve from investing in property. Realising this will help you plan an investment strategy and work towards achieving those financial goals.