Why invest in property
Posted on 24th June 2020 at 16:42
Questions, questions, questions…. Investing can be a lot of fun and indeed very rewarding but the number of options available make it difficult to see the wood from the trees. My suggestion is to do a bit of introspective work and understand why are you investing in the first place. How much money do you want to invest and what are you trying to achieve with it? Is it to preserve cash for a potential future emergency? … is it to grow your capital and withdraw it out at some point in the future to buy a house, a car or provide for your children’s education? Is this need in the mid term, long term? or are you looking to generate a regular income? How about a combination of the above? This list is by no means exhaustive but you get the idea – start with end in mind!
If you are not already a sophisticated investor, the options which are most readily available are saving accounts, buying/selling of company shares in the stock market (in managed or self managed investment accounts) or property investment. I have tried all of them and will tell you about my experience in the hope you can benefit from it (i.e. save on the mistakes I’ve already made!). Let me first tell you about the first two options – the saving accounts and stock market investments. Please note it is too early to quantify the impact the pandemic will have on investments like property or the stock market. One thing however, seems very likely and that is that savings will get less and less lucrative as the price of money drops. So bear this in mind, the comparative figures below do not account for the effects of the pandemic or inflation have had on these markets so far.
So let’s start with savings. Putting your money in a savings account is not that different to stashing large wads of cash underneath your mattress. The rates of interest that banks offer are so low they are can be considered negligible. I believe inflation will erode your investment over time so you will be loosing money rather growing it. The two main reasons why I would put cash in a savings account today is to have some emergency money and to be able to move quickly should one of the other two investment opportunities present it self. In the context of investing however, I think keeping cash in a savings account is a poor choice in the long run.
Stock Markets - The one thing I learned about investment in the stock market is that you can get lucky and you can time the market perfectly and pick the right stocks in quantity and exit at the right time. Sooner or later, if you keep making bets as you would in a casino, the house will eventually win. I am a great believer in the practical guide to investment provided by Time Hall in his book “smarter investment”. He argues the way to invest in the stock market is to play “the house” and invest passively on the market by tracking an index, say the FTSE 100. In terms of performance over the long term this will put you above the average investor on that market as the costs are less than if you pick individual stocks in the hope that will perform better than the market. This is good news because virtually anyone can invest this way. So let’s look at the historic performance of the market in the UK. The compound annual return of the FTSE 100 over the last 25 years has been around 6.4%. This is good, better than saving, but in my view it is not amazing. In real terms if you account for the cost involved, inflation and take away compounding by not re-investing dividends over that period, this percentage would actually be lower.
As a comparison, in the UK since the Halifax began tracking property prices they have increased around 13% annually. This again would reduce if you take costs and inflation into account. The point is that property prices have been on a trend of steady growth for decades and even if there have been recessions and the prices have dropped as they did in 2008 over the long term the property values have proved very resilient and have come back to beat previous records. Let me make this clear - Property investment is like any other investment in that there are risks involved and you may not get more than you put in. This has happened in the past and will happen to investors in the future, mainly because they lack some basic systems and knowledge. Properties just like stocks are subject to market cycles and the trick in all this is to adjust your strategy depending on what cycle you are in. The advantages of the properties over stock market equities or shares are as follows:
a)Properties you buy are physical objects you can touch so they have an inherent value. When companies go bust, their shares can plummet and be almost worthless. A property, at least in the UK retains a certain amount of value even in times of crisis.
b)A property is an asset you can adapt and change to suit the market and increase its value – you can be creative about it. With shares in the stock market, once you buy, all you can do is check the price on the screen and hope it goes up.
c)The population around the world is increasing and land available is limited. This drives the demand up and supply is unable to meet that demand. Land prices are what drives the capital growth. This means even if the house gets old and dilapidated, the land it stands on is likely to increase in value along with your asset in the long term.
d)Having somewhere to live is not something that people can cut during times of recession so even if property prices fall during a recession, rentals tend to stay strong.
e)Properties can provide a regular income as well as capital growth. The profit you make by renting a property can support, replace or supersede your salary many times over if done correctly.
f)Most importantly in property investments you can leverage your capital using other people’s money – most commonly mortgages. The return on your investment can multiply by factors of ten by leveraging, specially now that the cost of lending is so low.
g)Some property investment strategies do not require you to have a large amount of capital to invest in the first place – In fact you can start with very little or no capital. Rent to Rent or Lease Options are examples of advanced strategies which can be used to create the necessary capital to buy property.
As you can see property offers a level of flexibility and leverage that make it a great asset type for any investor looking for a secure way to generate passive income and grow wealth in the long run. That said everyone is different and property investment may not be the best option. I refer you back to the start of this blog, to really consider what your investment objectives are. For anyone looking to start investing in property it will take some time to learn the basics. This is something I strongly recommend to anyone looking to jump into property investment. There is a world of information out there and for someone just starting it can be difficult to pick the good sources.
Property investment can be straightforward provided you follow some basic rules, picking the right strategy, knowing your area very well and doing your numbers before you make an offer. I found particularly useful talking to other investors to find out what sort of investment they have done in the past that worked for them.
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