If you are thinking of investing your money into property, please don’t until you have really thought it through and read the essential tips below.
There are three things you need to know before you invest in property:-
Property isn’t guaranteed to make you money
I regularly see properties selling for less than they were bought for. For example, a property bought for £132,000 in Nottingham, in 2000 sold 13 years later for £105,000. It’s not an isolated case either.
Adding a property to your wealth could make you poorer
If you add money to your ‘wealth’ through property investment, it can affect the tax or benefits you pay/receive. For example if you have kids and get child benefit, be careful your rental income doesn’t mean you lose your child benefit. Or if you pay 20% tax at the moment, it might mean you end up in the 40% tax bracket.
Watch Kate's video 'Investing pensions in BTL property'
Property prices DON’T double every year any more
The idea that property prices ‘double every ten years’ isn’t true. Many cities such as Swindon and Nottingham haven’t increased at that rate at all in the last 10 years and are unlikely to do so in the future.
Don’t panic – you can still make money, but only if you are clear about your objectives:-
Property works as an investment well when you gear it. What this means is if you buy a property worth £100,000 with a deposit of £25,000, and it goes up by 10%, it’s worth £110,000. Your asset would now be worth £10,000 more than you invested in it.
In contrast, if you invested the £25,000 in stocks and shares and it grew by 10%, it would only be worth £2,500 more.
If you buy to let and let the property out during the year with a net income of £2,500 after all costs, then you haven’t just earned £10,000 extra from the investment, but another £2,500 in income, so overall that’s £12,500/£100,000 ie a 12.5% return.
BUT and it’s a big but, properties aren’t and haven’t been growing at 10% a year, bar some parts of London and even if they were, you have to take off:-
Costs of buying and selling
Deduct inflation which is 3% on average a year
The result? Anyone who buys a property with a 75% loan to value on an average 5% mortgage rate with a yield of 5.5%, will earn zero net income - if you rent your property out legally.
Shelter/Strategic Society estimate 20% of landlords already don’t earn any income from buy to let at all.
Another risk is if (and when!) prices fall. You can end up in negative equity, so not just earn nothing but end up being repossessed. For example many places such as Nottingham, Liverpool, Manchester and Leeds saw falls of 25% in property prices. So if you bought a property in 2007 for £100,000 in 2013 it would be worth £75,000.
Where property typically does well versus other investments is when you gear it and when prices go up. So as long as you can borrow and buy a property which will grow in value – ideally because you bought it for less than its worth or because it’s a renovation project or you add a bedroom.
When buying to let the most important thing is to first work out – what do you want? Capital growth or income? If it’s income you want then you should be aiming for a property which delivers 7% plus yield, if it’s capital growth you are after it needs to deliver ideally an immediate uplift or be growing at more than 3% each year to take the increase in cost of living (inflation) into account.
Watch Kate's video 'Investing pensions in BTL property'
Need help with your investment objectives?
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