Just suppose you could raise £100,000 to invest in property.
You might decide to buy just one £100,000 property with it. If that property were to increase in value by 5% in one year you would have made £5,000 wouldn't you?
Now let's look at another strategy. 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 along with all the associated costs of owning and letting a residential property. In this example we are going to borrow £75,000 and invest £25,000 of our cash to fund the balance of the purchase price. Now, if the property increases by 5% we will have still made £5,000 but we have only invested £25,000. This is a 20% return on our money!
A prudent investor would not just buy one property though. They would probably buy three 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 (25% deposit for each property). This would leave the investor 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 £300,000 worth of property which, assuming 5% growth per annum, would equate to a profit of £15,000 a year.
The key to successful investing
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. Focusing on the increase in values is not much use either unless you're planning to sell the properties - or perhaps it is?
The key to successful property investment lies in a strategy to get money out of the properties as their values rise, without having to sell. This is all down to setting up the right mortgage in the first place.
In the previous example, you might have decided to borrow 70% instead of 75% on the basis that the mortgage interest rate was slightly cheaper. However, you would have invested £30,000 to make £5,000. This is a 16% return. In other words, you would have reduced your return from 20% to 16% perhaps only to save a few pounds a month in interest.
Property should always be a good investment as long as you do your homework. You need to take professional advice. Choose your advisers carefully. A well established property manager will guide you to the right property type, area and tenant. We will be delighted to refer you to sources of cost effective methods to Find a Tenant quickly and secure your cash flow by ensuring you receive your Rent On Time.
We strongly recommend that you review your portfolio of mortgages regularly to ensure that your returns are maximised and risks are minimised. Some of these risks are not immediately apparent, e.g. capital gains tax and inheritance tax. Additionally, interest rates are not the only expense items that you can save money on. For further information click on any of the links below:
To maximise your returns you need The Money Centre.