Understand the 4 ways to profit in property

Understand the 4 ways to profit in property

In the UK well located properties tend to have a good capital but poor cash flow and those properties offering good cash flow, tend to have poor capital growth.

I can understand why many first time investors want to get involved in positive cash flow properties. They are much easier to buy and keep because you don’t have to put your hand in your pocket every month. That is all well and good if you want income. But income alone doesn’t make you wealthy, it just provides you spending money and after tax there isn’t really that much money to spend.

Over the last couple of years we have seen many first time investors rushing out to buy property that shows positive cash flow. Unfortunately, some of these properties will probably create problems for them in the long term.

The problem is that if a large number of investors do this prices can become artificially inflated. This gives investors a false impression that they have bought well, that their properties are performing well and they are becoming rich. However, what most of these investors don’t realise is that many of these areas are experiencing no real growth.

We are not saying that positively geared properties are bad. We are just saying be well informed about where you buy and why you buy your property. There are other ways to get money out of property than through rental income.

Investors must understand there are 4 ways to make money out of property investments and most of the time they only look at one or two of these. Let’s look at them….

1. Passive Appreciation
This is when the property value goes up in line with the general property market. Generally, the UK property market doubles in value every 9 years on average.

2. Active Appreciation
This is when you add value to your property. For example if you buy at a level below the true market value of the property and then revalue at the correct value, or when you renovate or redevelop your property.

3. Rental Return
Rentals from property provide cash flow, but this is only one component of your overall investment return.

4. Tax Benefits
It has often been said that its not how much money you make that is important, but how much you keep after tax. But investors who own a number of properties and have a “property business” can take advantage of some interesting ‘tax loopholes’ only available to business owners.

To invest in a top performing property it is best to have a balance of all four of the above elements. Don’t focus too strongly on cash flow. This is because well located residential properties are inherently high growth, low yielding investments. You really can’t get high growth, high yielding residential properties at the same time, as generally rents lag behind capital growth.

We have come across many investors who have been very successful in the long term with safety and without speculation. These are the ones who bought quality properties in good locations and allowed them to grow in value. They bought them for their strong capital growth and they never or rarely sold their properties. Instead they would refinance their investments as their equity increased.

The lesson one can learn from these successful investors is to buy the best quality properties you can, in the best location you can reasonably afford and never sell them.

You further boost the returns on your investment by purchasing well. Never overpay – buy at or below ‘fair market price.’

You can then add even more value to your investment properties by renovating or redeveloping your properties.