Predictable & Secure
Investing in real estate is one of the safest investment options. Even though risks still can’t be eliminated, the property market is way more predictable than any of the other investments people may be interested in. Based on previous data, it is very unlikely that property investors will lose money. This ensures security unlike stocks for example, which are usually unpredictable and don’t follow any particular pattern. To further show property’s stability, average property prices have nearly tripled in the UK over the last 20 years from £89,000 in 2000 to over £250,000 in 2021.
In the unlikely event that the market experiences a downfall, it is almost certain to recover strongly, meaning no major financial damage is done in the long term. The most common way people lose money in property is by selling their investment during a downfall, however, this does not happen often. Property investing, is a long-term investment, with the focus on building capital over time. Investors should only sell their property if they are satisfied with the profit it will give them. If it isn’t offering the returns desired at that time, investors can hold on to the property and be sure it will increase significantly in value.
The market is so predictable due to the measurable statistics that can have an effect. Data such as population, demand, and regeneration will all positively affect the market and they are all long-term factors that won’t change overnight. Giving investors the peace of mind that they won’t suddenly lose money.
Various Sources of Revenue
The most common way to make money from property is to invest in buy-to-let. There are 2 main sources of income when it comes to buy-to-let. A passive income from tenants’ rents is one income and capital appreciation on a property is another way to gain profit. Both of these will vary depending on the location and type of property an investor purchases.
Rental income is an immediate income that is the most important income when investing, therefore it is a crucial factor to look at. A rental yield is what is used to predict the potential rental income from tenants and it will vary depending on the area. A rental yield is one of the most important metrics in determining whether a property is a good investment.
Capital Appreciation is a long-term goal that will provide you with a larger sum of money at once. Investors can either sell the property for a profit or refinance the property and release equity to see this profit. Due to the stability of the market, most properties will experience growth, but some more than others in certain locations. Capital growth should be considered a ‘bonus’ when choosing property as this will only allow investors to see a large profit after a couple of years.
There is also another way to receive capital appreciation, and this is through forced appreciation. Natural appreciation happens over time as the property market grows, whereas, forced appreciation is the return on investment through renovations and upgrades. This will boost the property value and can be done in a shorter amount of time, rather than waiting for the market value to naturally increase.
Property Can be Leveraged
Although some people would rather invest in a property with cash, most investors purchase through a buy-to-let mortgage. This is a huge benefit compared to other investment options due to the fact investors can utilise the property’s significant leverage. Essentially, investors can own a property without paying its whole value.
In the UK, a 25% deposit is usually required in a cash deposit and they finance the rest. Once the deposit is paid, the property is now owned by the investor who can then start renting it out. Once the property is being rented out, the rental income should exceed the required mortgage payments. Investors can also look forward to the capital appreciation they will receive in the future. These returns will have been achieved by only paying 25% of the property’s value, generating an amazing return on investment.
A common mistake people make when calculating the ROI is looking at the yield they would receive based on the purchase price and the predicted rent achievable. Instead of looking at the return they are receiving on their actual cash invested. Due to this, yields will seem lower as it is based on the whole property price which is significantly higher than the 25% actually spent to invest.
More Value for Cash Invested
If we compare property investment to investing in stocks, investors cannot use the same leverage and will be purchasing without lending. Meaning, if you had £125,000 in cash you could buy five properties priced at £100,000 each, with a 25% deposit. In total, these properties will have a value of £500,000 whereas investing in stocks you would only be able to have £125,000 worth of shares for the same amount of money.
Investors can use buy-to-let mortgages to purchase multiple properties for a combined value worth way more than the total money they have in the bank. If an investor has a considerable amount of cash in the bank then they can purchase multiple properties at the same time. However, if an investor has enough cash for one deposit they can easily still build a portfolio. This can be done by taking out the equity from a property through refinancing it.
For Example, if a property is purchased for £100,000 with a £25,000 deposit, and then it increases in value by £50,000 after five years, the investor will have £75,000 of equity in the property on an interest-only mortgage. Investors could then re-mortgage the property at its new value and take out £37,500 (leaving in a 25% deposit). With the £37,500, there is now enough money to purchase another investment property, this time worth £150,000.
Constant Growth
The population has been growing steadily over the last 50 years and does not look like stopping. In the UK, It is expected to grow to 74 million people in the next 20 years. This will lead to an increased demand, expanding the supply and demand gap, and leading to property prices rising.
Population growth does not only impact house prices, but it also drives rental prices up. There is a predicted steady decline in the percentage of UK homeowners due to a rise in property prices. People in the UK are staying in rented properties for longer as prices to buy a property are becoming more unaffordable. Therefore, pushing the average age for ‘generation rent’ up. This is sure to largely benefit landlords as the yields they are predicted to achieve on their investment properties are rising at an impressive rate.
Based on current data it is predicted that in the late 20th century, there will be more renters in the UK than homeowners. With predictions stating that as many as 50% of adults under the age of 40 are expected to be privately renting by 2021. And nearly 51% of the entire population within the next 20 years. These percentages are an indicator of the future demand for rental property and further highlight why real estate is such a secure investment.
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