Imagine you could raise £100,000 and you decided to invest in property.
You could decide to buy just one £100,000 property. If that property were to increase in value by say, 5% in one year you would have made £5,000.
But there is another way to do it…. For this example we are going to assume that we can rent out the property for enough money to cover the interest costs on the maximum possible buy-to-let mortgage, together with all the associated costs of owning and letting a residential property. In this example we are going to borrow £85,000 and invest £15,000 of our cash to fund the balance of the purchase price. Now, if the property increases by 5% we have still made £5,000 but we have only invested £15,000. This is a 33% return on our money!
A prudent investor would not just buy one property though. They would probably buy five on the basis of spreading risk, safety in numbers and economies of scale. Assuming the properties are worth £100,000 each, the deposits would amount to £75,000. Therefore, the investor would be left with £25,000 to cover other purchase costs such as fees, stamp duty etc. still leaving a healthy surplus for contingencies or a ‘rainy day’. This would mean the investor had £500,000 worth of property which, assuming 5% growth per annum would equate to a profit of £25,000 a year.
This is all very well; However, the key to successful investing is making a meaningful return. In the example above, the rent only covers the costs, so there is no surplus there. The increase in values is not much use either unless the property is sold – or is it?
The key to successful property investment lies in a strategy to get money out of the properties without having to sell. This is all down to setting up the right mortgage in the first place, and knowing where you wish to take your property investment plans.
In the previous example, you might have decided instead to borrow 80% on the basis that the mortgage interest rate was slightly cheaper. However, you would have invested £20,000 to make £5,000. This is a 25% return. In other words, you would have reduced your return from 33% to 25%, perhaps only to save a few pounds a month in interest.
It is true that bricks and mortar can be “as safe as houses”. However, to be sure you need to take professional advice. Choose your advisors carefully. A well established property manager will guide you to the right property type, area and tenant.