Why invest in property?
Why invest in property?
There are lots of ways to make money and some people would argue that property investing isn’t really that easy. They complain that it takes time to develop the knowledge to understand the property market. It can take months to research areas and find the right investment property. Then when you’ve found it, you need to negotiate to get it at a favourable price, negotiate a loan, instruct a good solicitor…
Is this all starting to sound too complicated? You are not alone that’s the very reason some people ignore property and choose to simply park their money in shares or managed funds. But the simple fact that property millionaires out number any other shows us that property investment really is well worth the effort.
A good investment has two elements:
1. High capital growth, which allows us to grow our net worth quickly, and
2. Secure income, which increases over time.
This is why residential property must be key to your wealth-building program. Let’s look at the reasons to invest in property in more detail…..
1. More Millionaires
Quite simply, property millionaires outnumber those of any other investment class. Those that haven’t made their money directly from property generally invest in it indirectly. Remember, there’s nothing wrong with seeing what successful people do and applying those principles to your own life. If the majority of extraordinarily wealthy people have used property profitably, it stands to reason that there’s money to be made in this sector.
2. Anyone Can Do it
Property investment is not just for the wealthy. It doesn’t really take large sums of money to get involved in real estate. This is because banks will lend up to 95% and sometimes even 100% against the security of residential property, which means that most people with a steady job and a little capital behind them can afford to buy investment properties.
Banks have always recognised property, and especially residential property, as an excellent security. The reason they’ll lend you up to 90% of the value of your property is that they know property values have never fallen over the long term.
Another factor contributing to the security of property investment is that of the percentage of owner-occupiers, that is people owning or paying off their own homes. Owner occupiers outweigh investors by a huge amount, which means that residential property is the only investment market not dominated by investors, and this effectively gives investors a built-in safety net. Even if all the investors were to leave the market at once, it would not totally collapse.
4. Income That Grows
The rental income you receive from your investment property allows you to borrow and get the benefit of leverage by helping you pay the interest on your mortgage. Over the years the rental income received from property investments will increase particularly in times of a slower market such as the current market.
5. Consistent Capital Growth
Residential property has an unequaled track record of producing high and consistent capital growth. Generally speaking, the value of UK residential property doubles every 9 years.
Imagine you own a property portfolio with a value of £1million. Usually you will have some equity or your deposit and you borrow the rest. Imagine you had 10% deposit and borrowed the balance (£900,000) from the bank. After 9 years you would still owe the bank £900,000 (assuming you had an interest-only loan) but your net worth would have increased from £100,000 to £1.1million. Your net worth has increased over 10 times even though the value of the property has only doubled. You would be a millionaire in just 9 years with an initial investment of just £100,000. Now where else could you achieve that?
6. You Can Buy It With Someone Else’s Money
The return you get on property if you pay for your purchase using all cash (without getting a loan) isn’t much higher than that that you can achieve with other types of investments.
The important difference is that with property you usually don’t pay using raw cash; instead you use someone else’s money to buy your properties. That is, you put down a small deposit, often 15%, and the bank finances the rest. This is called leverage.
Archimedes said, “Give me a lever and I’ll move the earth.” The ability to use leverage with property significantly increases the amount of profit you can make and, importantly, it allows you to purchase a significantly larger investment than you would normally be able to.
Because of its history of security, stable income and proven capital growth, residential property is regarded as a prime security or collateral for loans, which means that banks will often lend you 90% of the value of your property or in some circumstances even more.
7. You Are In Control
Property is a great investment because you make all the decisions and have direct control over the returns from your property. If your property is not producing good returns, then you can add value through refurbishment or renovations or adding furniture to make it more desirable to tenants. In other words, you can directly influence your returns by taking an interest in your property and by understanding and then meeting the needs of prospective tenants.
8. You Can Add Value
There are hundreds of ways you can add vale to your property, which will increase your income and your property’s capital value. These include little things like giving it a coat of paint or removing the old carpet and polishing the floorboards underneath. Or you could do major renovations or development works.
9. You Don’t Need To Sell It
Unlike most other investments, when property goes up in value you don’t need to sell in order to capitalise on that increased value. You simply go back to your bank or mortgage broker and get your lender to increase your loan.
10. Most Forgiving
Even if you bought the worst house at the worst possible time, the chances are good that it would still go up in value over the next few years. History has proven that property is possibly the most forgiving investment asset over time. If you are prepared to hold the property over a number of years, it’s almost guaranteed to rise in value.
There’s really no other asset class quite like property!