Why Make An Investment Into Property

Anyone with a little financial knowledge can now see that putting your money in the bank for retirement is simply no longer an option. Even trusting government gilts or fluctuating share prices is now more risky than ever.

People are living longer and the cost of old age is rising, which is why it is vital that we all make our money work for us as best we can and take control of our own financial future.

Thankfully, there are now many creative opportunities available to the modern investor, with property investment being one of them.

Not only does property make a financial investment for the future, but with the range of holiday homes, student accommodation and buy-to-let options now available, it is possible to create an exciting and creative investment portfolio to create wealth at any age.

Property Investment Vs. Equity Speculation

Rates of Return:

When it comes to choosing the right investment strategy, a heavy influence is going to be your own perceptions of each market’s performance over the years.

Right now, many people feel that stock market investment is incredibly risky due to the recent stock market crash, yet many of those that invested wisely had done very well in the preceding years when the market was at its most buoyant.

In the same way, the current feeling in the property market is very optimistic as those buying their own homes see the increases in house prices that have hit us all in the short term. But do you remember back to the early nineties when negative equity was a word on everyone’s lips?

 

Short term views such as these can provide an indication of your own attitude to risk, but when it comes to comparing the performance of financial markets, it is essential to take a much longer term view so that it is much easier to identify the underlying benefits of each type of investment.

When taking a 35 year view stance, which irons out short term peaks and troughs, house prices have actually increased by an average of 11% per year.

Now when you directly compare this to the average 13% growth in the stock market over the same period, property investment does not seem as attractive, but such statistics only tell half the story.

When it comes to equating house prices with property investment, one of the key anomalies is how the value of the return that is calculated.

It is the case that most people who invest in property do so by using some form of capital purchase agreement or mortgage.

Interest accrued is then repaid from the rental payments made on the property itself. Or in the case of your own home, is paid from the money that you effectively charge yourself in rent.

And when you look at property investment in this way you see that the actual sum placed in the investment is not the value of the entire property, but solely the deposit that you yourself have made. The value of the returns on your investment can therefore be considered in relation to this amount and not the entire property cost.

When calculated using a return of investment of the actual money you, yourself, have placed into the venture, the returns available on property investment are significantly higher than first anticipated.

For example, if you achieve a 10% return on a property in which you have only invested a 20% deposit in, then the 10% return should not be equated to the entire value of the property but solely on your 20% stake.

Deduct the interest paid on the outstanding amount, and returns on actual investment made in property investment are closer to 50-100%. Such figures have made property investment far more attractive than investing in the stock market over the same period and have drawn the attentions of many creative investors.

Obviously, leveraging your investment in such a way does come with its risks. Paying cash for a property with the same 10% return would equate to an overall gain of only 10%, but the risks associated with a fall in price would not be so great.

If 80% of the value of the house comes from borrowing and the house prices fall, then the same multiplying factors that work on positive return would also impact the level of loss felt, which is why property investment of this type should never be considered for short term speculation.

Diversity:

Any astute investor will tell you that diversification is the key to financial success. Not only does it provide a more dynamic and exciting portfolio but it will also spread the risk inherent in any type of investment.

And as more and more people see the flaws in placing all their funds within the stock market, property investment is being seen as a valid alternative that can provide potentially high grade returns even when other markets are in decline.

As with any type of investment, focusing on property alone can provide a risky option. When rental income is your only source of income against high levels of debt, the balance of risk and reward may be hard to equate. However, when included within a balanced portfolio, property investment can create the diversification required to provide a solid foundation for future financial success.

Expanding into Property Investment

Though many may consider they are already involved in property investment, purely by the fact that they own their own home, this is not really property investment in its truest form.

For a property to be considered a valid investment it needs to be able to be liquidated when the return is right. However, there aren’t many individuals who would want to turn their partner or family out of their home, just to make a few extra percentage points on their capital.

Although the family home is a good place to start. It can provide the collateral for future investment, or it can provide the inspiration to buy a holiday home or start looking at buying a second property to rent out.

This is not an easy option. There are tax implications, the risk that the property will remain vacant and up keep and maintenance costs to consider. However with a little knowledge and a strong long term property market, the opportunity to out perform equity investment exponentially over the long term has meant property investment is a very real and reliable source of long term capital gain for many.