Why Invest in Rental Property?

Why Invest in Rental Property?

So it was around 2003.  That’s more or less when I first remember thinking about property as an investment vehicle.  I was in my early twenties and I was in no way considering it seriously.

Back then I had a bad habit of chasing the next shiny thing that crossed my path, be that online day trading in stocks and shares or peer-to-peer lending. Don’t get me wrong, both of those examples do have a lot of merit and are viable investing options, but it was my distracted and flighty state of mind that did not lend itself to making a success of any investing.

I suppose the lesson here is that, once you pick something you need to commit to it and see it through. And so it was only nine years later, in 2012, that I finally got into property and let my first rental.

But why choose property?

Simply put, when I looked into it, it turned out to be the path that had the greatest return on investment (ROI) whilst remaining accessible to the average person. Here are some of the top reasons, financially, to get into property investing.

It is a physical asset.

And by this I mean that you own the property (once paid for of course). And this gives you a level of security that you do not get when you invest in stocks and shares.

Here’s an example. If you buy shares in a company and the company gets into financial trouble, the value of the shares tank and if the company then goes bust, it’s all gone.

But if you own a property and you get into financial trouble, your property’s value is rarely linked to it and therefore you can either use it to raise capital to see you through the tough times, or you can sell it to release the funds.

Capital Growth.

This is the increase in value of the property over time. Stocks benefit from this too, but they are much more volatile and for whatever reason, influenced by emotions to a much greater degree.

This increased value can then be released (equity release) to fund the purchase of another property or for other reasons such as renovating a property or for funding the expansion of your business.

Whilst it is not guaranteed and is dependant on a number of factors such as supply and demand, location and type of property to name a few; the value of property will generally go up if you are in it for the long haul.

Looking ahead to the future, don’t forget that the UK population is growing and living longer. This combined with too few new houses being built has led to a strong growth period for property and is likely to continue into the foreseeable future.

Cashflow.

When we are talking about cashflow, we mean the amount of money that flows to you after all expenses. And unless you have invested in a dud property, this will beat the dividends from the stock market most days of the week.

Side note: Remember that Cashflow-is-King. Maximise this and you will grow your property business faster than you may think. I had weak cashflow in the early years and it is no surprise that I was unable to expand as I would have liked.

Leverage.

Or using someone else’s money to expand your business and maximise your profits. Imagine you have £100,000 and you want to get into property. Now let’s say that the average investment property is going for £100k and lets for £500 / month.

If you do not use leverage then will need to buy the property outright, meaning you can buy the one for £100k and therefore make £500 / month

On the other hand, using leverage, you could buy 5 x £100k properties and pull in £2500 / month. Granted, there will be more costs such as the interest payments for the loans, but the profits will still be higher. Even if the extra costs totalled half of the rent, you would still be bringing in more than double the rent.

And don’t forget the capital gains on 5 properties compared to only 1.

Last point – You cannot do this with stocks and shares unless you are a professional investor. But the beauty of property is that the average person can access these kind of high return investments, all they need is the know how.

Add Value.

Something else you will struggle to do with other types on investments and definitely cannot do with shares.

With a property, you can increase the value by making changes to it.  This may be something simple like a new kitchen & bathroom and replacing outdated and tired fixtures or it could be a bit more radical, like changing the layout to better utilise space or add a bedroom.

But do beware, there is usually an upper limit of value you can add to a property, beyond which any money you throw at it will not benefit you.

Passive Income.

Passive income is income that flows to you with little or no effort from yourself. Dividends from stocks would be an example of this. Property can be passive too or it can be active, it is entirely your choice.

If you want it to be passive, you will need to set up systems for it to run without you such as having a team that runs it all for you. This team could be employed by you or contracted in, again, it will be your choice based on what works best for you.

In Summary.

So there you have it. Those are the reasons behind why we are investing in property as opposed to other investing options. Don’t get me wrong, I am not 100% all in with property. I have a pension and I invest in the stock market, but to a much lesser degree.

I have also not gone into the non-financial reasons for getting into property. Reasons like ‘I really enjoy DIY’ and ‘I love making an old place beautiful’ or ‘I love having a project that I can see through from start to finish’ all have their merits and should influence your decision to go down this path. It certainly did influence mine.


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