Over the last few weeks, I highlighted some of the challenges you may face when investing in property.
So, this week, I wanted to share ten reasons why I love it, and why you should too.
Property has several advantages over investing in stocks, bonds or mutual funds as it offers steady cash flow, capital appreciation, and a hedge against inflation. Plus, it’s pretty easy to understand, purchase, and finance.
Here are 10 reasons to make you love investing in bricks & mortar:
1. Anyone can buy property
It doesn’t matter where you’ve been, who you are, or how you did at school; property is open to anyone. Many people believe it is exclusively for the rich, and that is not the case. There are ways to gain access to the market without having to put up all the cash, as banks will lend you money.
2. Financial security
With financial security, you’re able to live the life that you want without worrying about money, paying bills or providing for your kid’s education. If you invest in the right type of property, it can be life-changing.
3. Passive income
One of the first rewards of property is rental income, and passive income means you get money each month without having to do a lot of work. Plus, the best employee is a pound, it’s never late or sick, and it works 24-hours a day, 365 days a year.
4. Property appreciates over time
There is a cyclical nature to the market, and it’s essential to understand it. However, if you do your research, invest at the right time and select an area that is attracting investment and redevelopment, the value of the property will usually increase. As the area becomes more attractive, properties become scarcer, driving up the value of your investment.
5. You can use the bank’s money
Leverage is a property investor’s best friend, and it essentially means borrowing capital through a mortgage to increase the return on your investment.
For example, if you purchased a property in cash for £200,000, and it had a net rental income of £15,000, your yearly return would be 7.5%. However, if you bought the same property with a 25% deposit (75% mortgage) over 30-years with an interest rate of 5%, your annual return on income would double to 15%, and that’s before you factor in capital appreciation.
Here is an easy formula to work out your yearly ROI (Return on Investment), annual net rent after mortgage cost/cash invested x100. £7,500/£50,000 x 100=15% ROI
(This example is to highlight the power of leverage. There will be maintenance & running costs to consider with any property)
6. Capital Appreciation
The above highlighted the annual return on investment income as a percentage—however, the greatest advantage of property investing is capital appreciation. Sticking with the same example, let’s say the property market grows at 5% per year for ten years, and at year ten you decide to sell.
At 5% growth per year, the value of the property will have risen from £200,000 to £325,778.93. You will still need to settle the outstanding mortgage, which would be £150,000—giving you a net return of £125,778.93. Bear in mind that your initial investment was only £50,000. Therefore, your return on capital is a whopping 251.55%. That is the power of leverage!
To work out your return, we use the same formula as above, net return/cash invested x100. £125,778.93/£50,000 x 100=251.55% ROI
(This example is to highlight capital appreciation. There will be multiple transaction costs to consider with any property)
7. Your tenant pays your mortgage
Ideally, the money you receive in rental income should cover your mortgage with a little bit extra, and once you have a tenant in place, your monthly repayments are covered. Having your tenants pay your mortgage means you have peace of mind and are free to do what you want.
8. Cash Flow
No matter what strategy you use, you have to make sure you have positive cash flow. The last thing you want is your financial situation to be tight and be solely dependent on income from your tenant. That is why it’s useful to diversify with several properties. That way if you have an issue with one, the others in your portfolio can make up the shortfall. Thus ensuring you don’t have to use your own funds.
9. Security for Retirement
According to the Guardian newspaper, an astonishing 31% of Brits have no private pension plan. Property can be a great tool to ensure you don’t fall into that category. If you do, then you would have to rely on the state pension which is currently £175.20 per week if you have made all your contributions. Living on £175.20 a week is not a pleasant thought, and income from a rental property could be an ideal solution to help you in your retirement years.
10. Generational Wealth
Once you find the right strategy and gain experience, you can create vast sums of wealth. There are lots of different ways to build financial security. However, If you are unsure of which path to take and you prefer a more tangible asset than the stock market, then property investing could be an excellent way for you to create wealth for you, your family and future generations.
Things to Consider
Never rush to invest in anything you haven’t thoroughly researched, triple-check everything and run the numbers a few times so you know how different scenarios could play out. If you do that, then it’s pretty hard to go wrong, and it can be one of the smartest ways to build passive income and financial security. With investing, the more effort you make upfront, the more you will gain in the future.