How to Invest In Property
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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?
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Phenomenal post, Matthew!
I am currently working through the trials of renting out a second property and there is no teacher like experience. If you’re willing to share, others should definitely listen!
One point of emphasis on the ‘handyman’s special.’ I purchased my primary home in a neighbourhood that I could never afford because it was a fixer-upper. It has been one of my best investments (monetarily AND educationally.) I am not sure I would have had the fortitude to go through with it if I knew how hard it would ulitmately end up being!
Hi Matt,
I have friends that are in the property business and they tell me that getting a mortgage is still really hard unless you have a lot of cash to put down as a deposit or are using some sophisticated financial bridging to allow you to take advantage of the discount that you have been able to achieve.
However, in the face of difficulties in getting mortgages, some investors are using lease options to secure the ‘ownership’ of the property thus avoiding the need for a mortgage.
Not as complicated as it sounds and can make the market accessible even without access to mortgage finance.
Adrian
Matthew Needham Reply:
March 29th, 2010 at 5:10 pm
Hi Adrian, thanks for your comment. It can be difficult getting a mortgage at the moment it all depends on how many properties you have and ironically your level of expertise. Seemingly the more experienced you are, the harder it is to get finance! Lease options are certainly a way forward. But whilst they are straight forward (and very common in the US, Australia and South Africa) to many people in the UK who are unfamiliar with them, it can be a difficult ‘sell’.
Details will be on the new blog!
Thanks for stopping by.
Adrian Swinscoe Reply:
March 31st, 2010 at 2:31 pm
Hi Matt,
Thanks for that. I’ll look forward to reading more about that on the new blog.
When will it be live?
Adrian
.-= Adrian Swinscoe´s last blog ..Leadership: What’s engagement costing your business? =-.
Matthew Needham Reply:
April 2nd, 2010 at 12:37 am
Thanks Adrian. Hopefully by end of Apri!
Great stuff man, I am new into this and can’t really add much but I took some notes since I am preparing to buy after I get out of the military. Keep up the great work man!
.-= Ryan Hanzel´s last blog ..Technology and its advances =-.
Matthew Needham Reply:
March 30th, 2010 at 6:03 pm
Hi Ryan thanks for this. I’m glad you’ve found something of interest. I will go into more detail on these points and many others on the new blog. Sign up to the newsletter to get advance details.
Thanks, Matthew
Hi Ben,
I totally agree that your house is not an investment. I always remember the saying that “you can’t eat your living room” when it comes to where you live. That is to say, it’s not a liquid asset and if you are starving but can’t sell your house to buy food, what good is it? It’s just somewhere to live in.
Also, it doesn’t always make sense to buy property. There’s nothing wrong with renting, if the calculations come out in your favour. People should run the numbers for a variety of scenarios to see which comes out better for their specific situation.
Karen
.-= Karen´s last blog ..Warning: Following These 5 Tips May Get You Out Of Your Rut =-.
Matthew Needham Reply:
March 30th, 2010 at 6:00 pm
Hi Karen, thanks for your comment. I have done exactly that. Instead of having a deposit in the house i live in, it’s invested in investment properties which I rent out. Consequently, someone else pays the mortgage of the house I live in and undertakes any repairs, I just pay the rent.
My rental properties effectively generate an income which pays my rent.
As a freelancer, it’s good to know that my core expenses are covered from residual income.
Thanks,
Matthew
Great education Ben,
We are taught this wrong and it is so hard to get people to see it like it is. Keep it up.
.-= Ralph´s last blog ..Shameless plug for Cantankerous Old Coots =-.
Matthew Needham Reply:
March 30th, 2010 at 5:38 pm
You’re absolutely right there Ralph. Thanksfor your comment, Matthew
Great article man!
Ive always being interested in real estate but being so young (soon leaving my teens) I have had no clue on where to start and Ive also being put off by the risks and amount of capital needed. Any advice?
.-= Martin´s last blog ..How to start a web hosting company in 6 steps :Teen Entrepreneurs =-.
Matthew Needham Reply:
March 30th, 2010 at 5:46 pm
Hi Martin, thanks for your comment. It is possible to buy property ‘no money down’ which we will go into in more detail in the new blog. Sign up for the newsletter and I’ll send you advance notification when the site launches.
Good luck and thanks for stopping by.
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