Property is in a bit of the doldrums at the minute. So many people are steering clear of it as investment, which reminds me of the quote by the world’s greatest investor, Warren Buffett
“Be fearful when others are greedy, and greedy when others are fearful”
So is now the time to invest in property? Well, property is like no other investment because as an investor you only use a small amount of your own money and borrow the rest. (This is called leverage).
For example; if you purchase a £100,000/$100,000 property and put a 10% deposit down and borrow the remaining 90%, you have £10,000/$10,000 invested in the property. Say the property increases in value at a little over 3% pa. After 3 years, the value of the property will have increased in value by £10,000/$10,000.
Which means that the property has increased by 10% right?
Well, the property has indeed increased by 10% but your investment has doubled, because you only had £10,000 / $10,000 invested in the property in the first place. This is what makes property investment unique.
Of course. If the property falls in value the leverage effect works in reverse.
However, you should never look at property as a short term investment, looking at a minimum of 10 years and preferably something you never sell.
Your home as an asset?
To many people their home is their retirement fund and therefore their biggest asset. However, for many people, their property also represents thier biggest liablity as the property has fallen in price in recent years and sadly some people now owe more than the property is worth (negative equity).
Even worse is that many people are sadled with 1000’s in debt as they have used their house to withdraw equity from thier property.
However, the real reason is that your home is not an asset, it’s where you live.
An asset is something that generates an income or rises in value – a liability on the ohter hand is something that costs you money or devalues over time.
So, let’s look at your home against the definition of an asset. Generates an income? Unless you’re running it as a bed and breakfast then no, rises in value? possibly over time on the other hand, costs you money? mortgage payments, maintenance and repairs – definitely, devalues over time? possibly.
Whilst property generally increases in value over time, this cannot be guaranteed. You should buy the house that you want to live in and not look to it as investment.
Property as investment?
On the other hand property makes a good investment for the reasons outlined at the begining of this post because of the advantages of leverage however, the following 5 points make property an excellent investment:
1. Purchase property below market value
Every day, in every city, in every country property is bought for less than the market value of the property. Now this maybe due for a whole variety of reasons, but for investment properties. Never pay list! So, if the market value falls, then you will be protected from price drops and also maximise any gain.
2. Get someone else to pay the mortgage
This means finding a tenant to rent the property, which in turn generates an income and allows you maintain the property and provide a regular passive income.
3. Location, Location, Location
When buying an investment property, it may sound obvious, but you need to by a property in areas where people want to rent. So this means near hospitals, large businesses, near universities.
4. Don’t buy for you
One of the most common mistakes people make in buying properties is buying for themselves and decorating it or furnishing to thier taste. Sadly not everyone likes your taste in leopard print wall paper or bright green carpets
5. Don’t buy a money pit
Just because a property is cheap and rundown it doesn’t mean that you should buy it. Unless you’re very capable at building works (and I don’t mean someone who can put up a shelf) then you should avoid these properties. Get a survey done before you buy it.
To learn more about property investing, join the mailing list as we will be shortly launching a property investment blog where we will expan on these ideas and look at methods of sourcing properties below market value.
What do you think?