Property
Introduction > > Property
This is a very popular form of investment, which we will look at after these words of warning:
If your house is worth more than when you moved in, it is NOT a sign of financial genius. It is a testament to the potential benefits of gearing an investment, especially in a rising market, as has been typical of the past few decades.
A mortgage is a mechanism by which people break the first law of investment – it is borrowing to invest. That’s a story that normally ends in tears, but with houses it usually doesn’t. The reason is simple, when you borrow to buy a house you end up with a place to live. You might have a mortgage, but you don’t have any rent to pay.
A mortgage also allows gearing. If you have £20,000 and invest it, and the market rises 10% you have a £2,000 profit. If you have £20,000 and you borrow another £80,000, and the market goes up 10% you make a £10,000 profit (before payments in respect of interest on the loan which would be due).
This is all well and good when it’s your own home, but many people then think that they can extend that into other property areas, or get a generally over-optimistic view of property as an investment (and thus make poor decisions).
Ways to invest in property with a view to making money:-
- Property Development
- Landlording
- Property Shares
Property Development
Many people may have looked at a run-down building in their area and thought something along the lines of “with a bit of effort that could be worth a bundle”. And they’d be right. The tricky part is to add more value than the cost of renovating it.
This is not an article about property development, but it is worth noting that if you borrow to buy, then time is money and every month you delay is another few hundred pounds lost profit, and that the key to successful development is planning the works to minimise costs, and working with conservative figures (especially regarding the expected sale price).
Landlording
Previously a bit of a disreputable profession in which gouging owners let their properties fall apart while threatening to break the arms of tenants so much as a day late with the rent. This business has seen a bit of an image makeover courtesy of the Buy-to-Let mortgage.
This is not an article about being a landlord, but if you are attracted by “Buy to Let” what you need to know before you think about mortgages is “what can I realistically expect to make in rent; how many vacant periods are normal; and how hands on will I be - very, or should I get an agent?”
NB: It is the opinion of this writer that a lot of naïve people got sucked into Buy-to-Let without fully understanding the business. Even if they lost money in revenue terms, they have probably made a profit due to the late '90s and early 2000's property rises, but in a stagnant or falling market they would not have been so lucky.
The FSA does not regulate buy-to-let mortgages.
Property Shares (and Unit Trusts etc)
Each of them is different - some will be all about residential development (Housebuilders), others seek to build rent generating portfolios of commercial or retail properties, and others are more new development oriented.
Be fully aware of the investment strategy of your choice, and ensure that it matches the market sector you seek exposure to.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Last updated on April 11, 2008
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