Why invest in property?

Why property? Some people ask themselves when looking for an investment. Well, as far as I’m concerned, real estate investing is, and always has been, the most powerful type of investment for building wealth. It has been said that more than 90% of the world’s millionaires got there by owning property. The reason ownership is such a powerful way to build wealth is due to one key concept: leverage.

Once I realized this, I didn’t look back. Now if you are an experienced investor this may be obvious, but for the benefit of those who haven’t seen the light of day, let me explain… Leverage is your ability to increase your returns by using other people’s money (in In this case, it is usually the money from the bank).

To give a clear example, let’s say you have £20,000 to invest. This can be a lump sum or through the release of equity in your primary residence.

So what is the best way to invest this money?

Option 1 – Save it at your local bank

Considered by some to be the safer option, “at least you can’t lose it and you get a guaranteed increase in value,” the argument goes.

Money in the Bank – assumed return: 4%

Now £20,000

1 year £20,800

5 years £24,333

10 years £29,605

As you can see, after 10 years, you’ve made virtually no progress at all, especially when you consider the effects of taxes and inflation.

Option 2 – Shares and Shares

Now, for the last 10 years, though certainly not the last 4 years, the stock market has been very popular. However, I cannot accept that it is a better bet. When I read that the stock market is a better bet in the next 2 years as it will go up 15% a year as opposed to the real estate market which can go up 5% a year this doesn’t take leverage into account so paints a very distorted picture!!

And I’ll show you why. It’s hard to say what kind of return you could get in the stock market, but let’s say you get 12% per year for the next 10 years, highly unlikely, but let’s stick with it. So if you could beat the odds and earn a 12% return every year…

Money in the Stock Market – assumed return: 12%

Now £20,000

1 year £22,400

5 years £35,247

10 years £62,117

Now that’s a big increase in putting the money in the bank, but it’s clearly not guaranteed. But can it be done better? I think you know what I’m going to say…

Option 3 Property

One of the best things about property is that it allows you to leverage the £20,000 to buy a £100,000 investment property (in other words, borrow the remaining £80,000 from the bank). Now let’s say the real estate market slows down to an average of just 6% return over the next 10 years. This would probably be a fair estimate in the UK, although there are many markets that are growing faster, let’s focus on the UK for this example.

Money in Property – assumed return: 6%

Now £20,000 (£100,000 property value – 80,000 mortgage)

1 year £26,000 (£106,000 property value – 80,000 mortgage)

5 years £53,823 (£133,823 property value – 80,000 mortgage)

10 years £99,085 (£179,085 property value – 80,000 mortgage)

Make sense? So you get a 6% increase on the full value of the property, not just the £20,000 you initially had. This is the power of leverage. In effect, you have increased your initial investment 5 times in 10 years! So even if the stock market rises twice per year as the real estate market for the next 10 years, you can still make a lot more money from the property.

Now, for simplicity, I have not included solicitors’ fees, agent’s fees, or stamp duty. It’s true that buying a property has more additional costs than buying shares, but it wouldn’t make a significant difference to your earnings – around 4% in the UK, higher abroad.

One thing to note is that in the short term you have increased your potential loss considerably, i.e. if the property value were to drop by 10%, you would lose more than your initial investment, because the property value would drop to £90,000 sterling. You still owe the bank £80,000, so you now have £10,000. By comparison, if the stock market fell by 10%, your investment would be worth £18,000, since you would only lose 10% of £20,000.

However, over a period of time, using leverage to good effect, and using all the other skills you need when buying property, property is by far the best investment for most people.

The numbers I’ve used have been very conservative, many people are making much more than this in property, whereas anyone making the same returns in the stock market will usually benefit from some sort of insider trading or take a spot. very high in the company. , I imagine!