Property Investment

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"Put your money into bricks & mortar"

How many times have you heard this phrase? There's absolutely no doubt about it, buying property to let out, when done with due diligence, has consistently proved to be a very lucrative long-term investment.

It's an area of investment that has become very popular indeed in recent years, (we've all seen the TV programmes!!) and it's no longer the preserve of the privileged or wealthy, anyone can do it.

So why is Property such a good long term investment?

There are 4 main reasons

Fantastic Returns when leveraged correctly (more on how to do this coming up) ~ Consider this...on average over the last 35 years (1971 - 2006), UK property values have doubled every 7-10 years (and rental income has doubled every 9-12 years), according to government statistics, the annual increase actually averages a very nice 11.74%. *Source: www.communities.gov.uk 2008*
Tried & Tested over the years ~ if you take a look at the Sunday Times rich list, you will find between 60 - 70% of the list have either made or hold their wealth in property. In the last 5 years, the number of UK millionaires has increased by 80%, property accounts for 85% of this increase. *Source: Sunday Times Rich List 2008*
Its Pretty Safe ~ don't get me wrong, there are pitfalls to avoid, but consider this... every single UK bank & building society will generally lend money all day long against property because (subject to meeting lending criteria), in their eyes, its safe as it offers very good security (and they don't like risk!).
Leverage (property investors best friend as you can use mostly the banks money to buy it) ~ because banks & building societies want to lend against property, they will generally lend you up to 75% (up to 85% in the right economic climate) of its value and all the investor needs to find is the deposit. To put this into perspective take a look at the following example ~

The Power of Leverage:

Question (2 parts): Supposing you had £100,000 to invest

Part 1. How many pounds worth of paper assets (stocks) could you buy for £100,000?

This is not a trick question by the way, with £100,000 you can buy exactly £100,000 worth of stock, (for any seasoned investors, please ignore buying on margins).

Part 2. How many pounds worth of property could you buy for £100,000?

Obviously, you could buy a £100,000 property outright. But knowing lenders will lend up to 85% you could get a mortgage of say £80,000 (80%) and use £20,000 as your deposit. If you did this you could repeat it 5 times spreading your £100,000 fund over 5 properties as a £20,000 (20%) deposit, this means you could then buy £500,000 worth of property!

This is known as Leverage or Gearing. Of course, you would now have a £400,000 mortgage to pay as you've borrowed £80,000 on each of the 5 properties, but as long as you have done your due diligence properly (this is absolutely crucial) the tenant's rental income should cover the mortgages.

Now considering that property historically doubles in value every 7 - 10 years, this means your portfolio (on average) would then be worth a cool £million, returning you £500,000 in equity for the original £100,000 outlay,

that's a 500% return on your money!!

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How Do You Buy Investment Property?

Funding an investment property is done via a Buy to Let Mortgage, lenders will generally lend you up to 85% (depending on the economic cycle) of the properties value, and you just need to come up with a minimum 15% deposit.

Buy to let mortgages are very similar to residential mortgages except the lending is based on the anticipated rental income from the property and not the borrower's income.

A buy to let mortgage is effectively self funded from the rental income, however, the lender will still want to check the borrower's status, the only difference being, the lending isn't based on the borrower's ability to pay as with a residential mortgage.

When lenders assess a buy to let mortgage application, they (depending on the lenders criteria) are looking for a minimum rental of 100% to 125% times the monthly mortgage (interest only) repayment. The potential rental will be assessed by the surveyor.

e.g. a £80,000 mortgage with an interest only payment of £370 per month would need to have a minimum potential rental income of £370.00 (100%) - £462.50 (125%) to make it fit on the lenders criteria.

The process for buying an investment property is exactly the same as a residential property, the emphasis is on doing your homework and making sure it is in a rentable area and the potential rental will cover the required borrowing to whatever degree the lender requires.

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Have You Missed the Boat!

With the huge growth seen in the UK property market since the turn of the millennium, it may seem like the ‘boat has already set sail' for new property investors.

You often hear phrases along the lines of "If only I had bought that second property 5 years ago when it was worth £...."

The point is, the property market, like all markets, is cyclical, it always goes in cycles, but if you look at it on a graph over a long period of time (say, the last 40 years) you will see it actually rises on average at a very smooth and consistent rate, today's prices will seem high (compared to the past), but they will also seem like a bargain a few years down the road.

Consider this. Property historically doubles in value approximately every 7 - 10 years, after every price boom everyone says it won't happen again yet it always has to date!

If you're serious, Jump on the Boat Sooner rather than Later!

There will be a continual stream of ‘investment property' boats passing by, the last one will always seem better than the current one, if you want to get to the other side where the money is, you are going to have to jump on one of them, with every boat that passes, the money potential waiting for you slightly reduces, when you do jump on one, you'll soon find yourself at some point, waving back towards the shore at all the other people who wish they had jumped on with you.

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Homework is the key... make sure any deal you look at works on paper before you pursue it. You can do a vast amount of research from your own home via the internet, you can also get lots of information from estate and property letting agents who will guide you on the best types of property, potential rental incomes and local demand. Mortgage advisers will give you advice and guidance on all the financials regarding investment mortgages.

After finding a potentially suitable investment property, let your Calculator make the final decision to purchase and not your Heart (those emotions do funny things to you!). Remember, you are not buying the property to live in but as in investment.

Other reasons to invest in property

They aren't making anymore land so the price of land and property always has and (if history is anything to go by) also will increase in value over time.
We keep making babies and increasing the population and as everyone needs somewhere to live, the demand for more property will result in increased property values over time.
The UK government has announced on several occasions that there is a growing national housing shortage as there aren't enough being built each year to meet the growing demand (i.e. a growing population, increased immigration and more people than ever living on their own). This will also fuel the long term increase in land and property values based on the law of supply and demand.
The rental income is basically index linked (the market sets the general price), you can increase it as you see fit, tenants will expect rent to increase periodically, just don't get too greedy.

Finally. Financial Wisdom says there are only 2 ways to earn money - 1) People at work, 2) Money at work. Assuming you're already doing the first one I strongly recommend you engage in the second one (if you aren't already) by acquiring assets that earn you money regardless of whether you work or not. What better way than Property Investment?

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