Is property still a good investment?
The imminence of Brexit has caused many to question whether property is still a viable and safe investment model for the future, and I am often asked if I am still confident that property will provide me with continued financial freedom. Without a doubt, my answer is always “Yes”!
Leaving political views aside – and taking into account that with or without Brexit property will unfortunately never be without its problems – I still feel that it is supremely versatile, which makes it an excellent investment for most people.
There are five reasons why property gets my vote as a better investment than all the rest, despite Brexit and whatever else the future may throw at us:
- Capital values grow at a higher rate than money rates
- Returns can be supercharged through gearing
- Property values can be disproportionately increased by spending on repairs and improvements
- With the buy-to-let loans virtually anyone can borrow to buy property
- And, it’s highly unlikely that property will ever go “out of fashion” as we will always need somewhere to live.
This week we are going to look at my first two reasons in more detail.
Capital values grow at a higher rate than money rates
Using a rather simplistic example, if you had some spare cash and were thinking of the future, you may choose to place your money in a savings account. Say you put £20,000 into a Building Society, and the account is paying 4% pa gross interest. Over the next year you would earn £800, less some tax if you are a taxpayer. And actually, 4% is a really good rate nowadays – you’d probably need to leave the money in a two or three year account.
But, at the end of that year, other than the interest, your £20,000 will still only be £20,000.
Now let’s assume you invest the same amount in property instead. If you buy even a modest property in a reasonable area, then you’ll know from long term historical trends that the capital value is almost sure to increase over any 10 year period.
According to figures from the Nationwide, house prices have increased on average by around 8% per annum since the beginning of 1993 despite recession, war, credit crunches, political crises, Chancellors U-turns, whatever. There’s no reason to assume that in the long run this trend of capital growth won’t continue. In fact, historically the rate of growth has actually been higher, nearing an average of 10% a year over the last 30 years or so.
What’s more, if you’ve bought with letting in mind you will receive a rent, or in other words, an income, as well as capital growth.
Returns can be supercharged through gearing
With the availability of buy-to-let loans, most people can borrow a sizeable proportion of the purchase price of residential investment properties.
A typical buy-to-let lender will lend a property investor 75% of the lower of the purchase price or the valuation. So, let’s assume you use the £20,000 to buy a property and can strike the same deal. If you can borrow at 75% to gear up, then after allowing a little for legal fees, stamp duty and bank charges for setting up the loans, you should be able to buy a property worth around £75,000.
By the way, if you are wondering if it’s possible to buy properties that cheap, the answer is “Yes, it is”, especially if you are prepared to look north (and west) of Nottingham.
If you are in a more expensive area you might need to add some noughts but the principle is the same.
Assuming a yield of 8% (which is probably the minimum we need to make buy to let work if we want to refinance and get our money back out – more on that in a future post), your gross income will be £6,000 a year. Of course, there is a mortgage to pay and it will probably cost you around £1,265 a year. (For this example I’m keeping it simple and am assuming an interest-only loan at 2% above Bank of England base rate. Again, there are good reasons for using interest only buy to let loans which I’ll cover in a future post).
One of the great things about buy to let and investment property is that the mortgage is all being paid for you by somebody else, aka the tenant.
In this case the net return, after allowing for the mortgage interest, is 6.3% (£6000 less £1265 divided by £75,000).
BUT, the return on YOUR money invested, the £20,000 is a whopping 23.7% (£6000 less £1265 divided by £20,000).
Clearly this is substantially higher than if you were to put your savings in the Building Society.
Although these are economically uncertain times, I do remain firm in my belief that despite what’s going on around us, it is still a good time to go into property. With low interest rates, volatility in the market meaning it’s easier to find bargains, and rents still likely to increase, property is ideal for providing income and capital growth. So regardless of what’s happening in the world, I have no doubts that it is still a fantastic tool to not only build a substantial pension, but to help you achieve financial freedom for the future.
Join me next week to find out more.
Here’s to successful property investing.
Peter Jones B.Sc FRICS
Chartered Surveyor, Author & Property Investor
PS. If you’re considering “property” as the path to your own financial freedom, why not take a look at my best selling “The Successful Property Investor’s Strategy Workshop” to help you get started. This is an account of how I put together my multi-property portfolio, starting from scratch and with no money of my own, and how you can do the same. Find out more at: www.ThePropertyTeacher.co.uk/the-successful-property-investors-strategy-workshop.