Time can be the property investor's most valuable ally
Unlike other forms of security, property is the one that more people know more about than any other.
Property is at once aspirational, investable, habitable and improvable. In contrast to shares, bonds, mutual funds and other forms of esoteric investments, property is real and tangible, an asset on which almost everyone has an opinion and, unlike equities, one with which we’re comfortable predicting a future value.
No-one would ever confidently suggest that the share price of company X will grow by Y%, yet we instinctively know that if we spend £X upgrading a property, its value will rise by a multiple of what we spend improving it; furthermore, this increase in value will compound over time. You cannot ‘improve’ a share, or add further value to a bond in order to produce better investment returns.
However, perhaps property’s greatest appeal lies in the way in which it can be financed.
Assume, for instance, that an investor buys a property for £155,000, putting a deposit of 15% (£23,250) down and borrowing the balance at, say, 2.5% over 25 years. His mortgage costs £596 a month, but the property yields a modest 4.6%, generating a monthly rent of £600.
Let’s now assume that, over the course of the next nine years, the property’s value increases by a shade over 5% a year and by year nine is valued at £226,000, ie £71,000 more than our investor paid for it.
Over the intervening years, of course, the mortgage has been reducing, so while the property value has risen by almost 46%, the remaining loan has fallen by more than a third, to around £85,000, leaving our investor with £141,000-worth of equity. Bear in mind that his original investment was just £23,250, a figure which, thanks to comparatively reasonable growth, has increased six-fold.
Far-fetched? Not at all.
This example is based upon actual figures for average UK house prices for the 2009-17 period; the numbers are produced by the Office for National Statistics.
I bought my first investment property in 1986 and so began a love affair with bricks and mortar which continues to this day; my most recent property investment took place last December.
Mistakes? Goodness, yes, but this article is to not meant to regurgitate tales of previous errors made by yours truly, (isn’t that what we refer to as ‘experience’? Ed), but to examine the wealth of opportunities offered by this inimitable asset class.
Of course, when it comes to opportunity, investors must be realistic. There was a time when the property investor could build a sizeable portfolio by focusing on snapping up bargains. Nowadays, however, almost all vendors know the value of their property to within £2.50, which makes this strategy virtually redundant.
Yet as the figure above show, time can be the property investor’s most valuable ally and as property values are expected to continue edging steadily upwards, unless you have ambitions to become a property mogul, taking a medium-term view can pay enormous dividends.
Upmarket estate agents Savills, for instance, forecast compounded UK property value growth of 14.2% between 2018-22, while accountants PwC expect growth of 3.9% this year and next before a steady period, between 2020-25, of average house price increases of 4.1%.
Clearly, market values have, on occasion, speared spectacularly upwards, but steady, forecasted growth of between 3% and 4% over a seven-year period is particularly attractive as interest rates remain anchored near to their all-time lows.
While opportunity continues to exist for the budding property investor, there’s enormous merit in ensuring your arithmetic ‘stacks up’ prior to taking the plunge.
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A property investment expert, Peter Sharkey produces regular articles for Hartford Homes which are reproduced here with his kind permission. © Sharks Media Ltd
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