Why Invest In Property?

Why property, some people ask when looking for an investment. Well, as far as I am concerned, property investment is, and always has been, the most powerful type of investment for building wealth. It has been said that over 90% of the world's millionaires got there by owning property. The reason property is such a powerful way to build wealth is due to one key concept: leverage.

Once I realised this, I didn't look back. Now if you are an experienced investor this may be obvious, but for the benefit of those who haven't seen the light, let me explain ... Leverage is your ability to magnify your returns by using other peoples' money (in this case, it's usually the bank's money).

To give a clear example, say you have £20,000 to invest. This can be a lump sum or by releasing equity in your main residency.

So what is the best way of investing this money?

Option 1 ? Stick it in your local bank by some considered the safest option, "at least you can't lose it, and you get some guaranteed increase in value" usually goes the argument.

Money in the Bank - assumed return: 4%
Now £20,000
1 Year £20,800
5 Years £24,333
10 Years £29,605

As you can see, after 10 years, you've made virtually no progress at all, especially when you consider the effects of tax and inflation.

Option 2 ? Stocks and Shares Now over the last 10 years, although admittedly not in last 4 years, the stock market has been very popular. However I cannot accept it is a better bet. When I read that the stock market is a better bet over the next 2 years as will go up by 15% a year, as opposed to the property market that may go up by 5% a year this does not take leverage into account and so paints a very distorted picture!!

And I will show you why. It's hard to say what sort of return you might get on the stockmarket, but let's say you get 12% a year for the next 10 years ? very unlikely, but let's just go with this. So if you could beat the odds and get a 12% return every year ......

Money in the Stockmarket - assumed return:12%
Now £20,000
1 Year £22,400
5 Years £35,247
10 Years £62,117

Now that's a big increase on sticking the money in the bank, but clearly is not guaranteed. But can you do better?? I think you know what I'm going to say?

Option 3 Property

One of the great things about property is it enables you to leverage the £20,000 to purchase a £100,000 investment property (in other words, borrow the remaining £80,000 from the bank). Now say the property market slows down to an average of only 6% return for the next 10 years. This would probably be a fair estimate in the UK, although there are plenty of markets which are growing more rapidly, lets concentrate on UK for this example.

Money in Property - assumed return: 6%
Now £20,000 (£100,000 property value ? 80,000 mortgage)
1 Year £26,000 (£106,000 property value ? 80,000 mortgage)
5 Years £53,823 (£133,823 property value ? 80,000 mortgage)
10 Years £99,085 (£179,085 property value ? 80,000 mortgage)

Make sense? So you make 6% increase on the full value of the property, not just the £20,000 which you initially had. This is the power of leverage. In effect you have increased your initial investment 5 fold in 10 years! So even if the stock market increases by twice as much per annum as the property market over the next 10 years, you can make far more money from property.

Now for simplification, I have not included lawyers fees, agents fees or stamp duty. Admittedly buying a property has more additional costs than buying shares, but would not make a significant difference on your profits ? around 4% in the UK, higher overseas.

One thing to point out is that in the short term you have greatly increased your potential loss ie if the property went down by 10% in value, you would lose more of your initial investment, because the property value would go down to £90,000, you still owe the bank £80,000, so you now have £10,000. In comparison if the stock market dropped by 10%, your investment would be worth £18,000, as only lose 10% of £20,000.

However over a length of time, using leverage to good effect and using all the other skills you need when buying property, property is by far the best investment, for the majority of individuals.

The figures I have used have been very conservative, many individuals are making far more than this on property, whereas anyone making the same returns on the stock market, will generally be benefiting from some sort of insider dealing or be very high up in the company, I would imagine!

Alan Forsyth is a full time property investor and developer with 10 years experience in UK and overseas. He is managing director of http://www.property-investment-tips.com which offers free independent advice and tips on property investment, courses, countries, strategies, mortgages and much more - with a free newsletter every 3 weeks giving latest tips and offers to over 500 investors. Sign up today at the site for free independent advice!

---

Why is Now the Time to Buy in Turkey?

Turkey is a paradise of sun, sea, mountains, and lakes... Read More

What To Expect In Closing Costs On A Home Purchase

Many are taking advantage of this year's low mortgage rates... Read More

What?s Your Style? A Guide to America?s Most Common Home Styles

Styles of houses vary across the country. From the New... Read More

Secrets of Making Money from Real Estate - Part 4

Analyzing and finding the right property deals:Firstly read my other... Read More

Negotiating A Short Sale ? The High Road to Huge Foreclosure Profits

Buying foreclosures can be extremely profitable for real estate investors.... Read More

Why You Need a Lender to Sell Your Home

Home sellers who are prepared to help buyers find financing... Read More

Real Estate Investing - House Problems

Houses can have lots of problemsReal estate investing requires expertise... Read More

San Antonio Texas Real Estate

The San Antonio, Texas real estate market is still going... Read More

Empty Nesters Flock To Inner City

Babyboomers whose children have left home, commonly known as "empty-nesters"... Read More

Home Staging Strategies

Who are you preparing your home to sell to?You, as... Read More

How to Become a Successful Real Estate Developer

Real estate investment and development has never been a more... Read More

Sell Houses Fast & Top Dollar: Design Psychology

How would you like to start a bidding war for... Read More

Use Targeted Decorating To Get A Higher Price For Your House

This article will show you how to sell your home... Read More

Listing Real Estate Online - Top Tactics for Boosting Sales

Listing real estate online can be a great way to... Read More

Real Estate Investing - The Marvel Of Home Depot And Lowes

Repairing a rental home (or your own home) use to... Read More

Should You Accept A Full Purchase Offer For Your Note or Not?

You could be facing a dilemma when considering payout options... Read More

Green Building Media Fact Sheet - Past, Present & Future

PastSpecialized, niche home builders began constructing resource-efficient, environmentally sensitive homes... Read More

Finding, Fixing, Financing, and Flipping - The Short Course

Most people get involved in Real Estate investing to make... Read More

Checklist for Buying a Home

I had a client who called saying that his bath... Read More

Zero Down Real Estate Investing

Zero down? Why would a seller want to walk away... Read More

A Beginners Guide to Flipping Houses

If you're dreaming of making money in real estate, it's... Read More

Do I Have To Buy Real Estate Through An Agent?

Sometimes when we are very busy professionals and very rich... Read More

Before You Buy A House ? Top 10 Tips

There are serveral things you need to think about and... Read More

A Real Estate Investing Primer

There are a great many books and web sites devoted... Read More

The New First Impression in Home Selling

As an ASP Home Stager® I know how important curb... Read More

Staging Homes for Top-Dollar Sales

Wouldn't it be nice to have Roger Hazard's design team... Read More

Spain Excellent Choice for British SIPP Investors

Second homes in favourite holiday destinations such as Spain are... Read More

Buying Property in Portugal

Portugal has long been a popular choice for people, particularly... Read More

What Can I Realistically Earn In A Lease Purchase Business?

If you're looking at Lease Purchasing as a business, you'll... Read More

Selling Your Home ? What Can Go Wrong With Pricing and Loans

So, you're selling your home (house, townhouse, condo, apartment, land,... Read More

Investing in Real Estate & REITs

Real estate investing runs the gamut in terms of risk... Read More

Real Estate Investing Is A Better Gamble Than The Lottery

Real estate investing begins when you move to the starting... Read More

How Can I Stop Foreclosure on My House?

We understand the being in foreclosure is a scary thing.... Read More