Can Property Investment Make You Rich?
Like many other ‘get rich quick’ schemes, property investment has its share of advertisers who claim it’s an easy route to wealth.
We believe that property investment can earn you a good return over the medium to long term, and it could make you rich. But, that is only possible with knowledge and hard work, backed by the right professional advice.
That approach is important because property investment carries risks as well as rewards, whether you are an investor with a diverse portfolio or a buy-to-let landlord.
Positive cash flow is essential
One of the most important elements of successful property investment is positive cash flow. Your investment must generate more than it costs.
That means your income from the property must be sufficient to cover your mortgage or other loan repayments and interest, tax, property insurance, maintenance and management fees — and provide a surplus.
Landlords have a choice. They can manage the property themselves, which takes up valuable time, they can hire a management company, which will incur additional costs, or they can do a half DIY approach and use low cost online letting services for things such as tenancy agreements, rent collection, tenant credit checks and referencing, advertising on the main property portals, rent guarantee, and deposit protection services.
Either way, without positive cash flow, you could be losing money on a regular basis and that counters any gain you might have made from rising property values. Although you might have bought a property in a rising market, assuming its value would continue to rise, experience indicates that a financial crisis can hit the property market hard.
A rise in interest rates and changes in legislation can also increase costs, so generating positive cash is an important way of reducing the risk on your investment and keeping wealth creation on track.
Appreciation helps, but don’t bet on it
Property rises have continued to rise over time, so, in some ways, assuming the rise will continue could be seen as a reasonable investment strategy.
The private rental market, for example, has seen significant short-term growth during the pandemic. Caution among High Street lenders has made mortgages harder to obtain, forcing people to switch to rent rather than buy. And, a shortage of properties for rental, coupled with increasing demand and a stamp duty holiday has seen a growth in buy to let.
If conditions change, demand for rental could fall and landlords might consider selling their properties, assuming value will increase.
However, relying on this approach alone is simply a form of gambling and carries a high degree of risk.
Combining appreciation with sound cash flow management reduces the risk and can generate good returns over time. Adding leverage to the equation can build even greater rewards and reduce the risk further.
As an example, investing £300,000 of your own money in a property and selling it for £330,000 would give you a return of 10 percent. If you funded the investment with a loan and only put down a deposit of 10 percent, your return would be significantly higher.
Improve the property to add value
While appreciation can give you a return without any effort on your part, you can take a proactive approach and increase the value of the property through improvements.
At its simplest, you might add value to an older, neglected property by redecorating and refurnishing or replacing older doors and windows. But you can add value to any established property by adding additional rooms, for example, remodelling the interior to create more space, or dividing a larger property to create an additional source of rental income.
While those improvements add to your costs and may increase the value of the property, you must calculate the potential yield before proceeding to ensure it will provide a worthwhile return on your additional investment.
Comparing rental levels and selling prices for properties similar to your planned version is a starting point but, again, it pays to take professional advice.
Make the most of depreciation
Like any physical asset, you can write off part of the value of the property as annual depreciation to reduce your business tax liability.
Although it’s essential to minimize the overall ‘running costs’ of your property investment, those costs coupled with depreciation could be an advantage, depending on your tax situation.
However, HMRC’s rules on depreciation are complex so it’s important to take professional advice from an accountant or financial adviser to ensure that you can maximize the benefits from depreciation.
Leverage your investments in a balanced way
Property investment looks like an attractive way to create wealth from many perspectives, with leverage a key contributor to success. But, it’s important to take a balanced approach and not over commit.
You need to take account of trends in interest rates, which are currently at an extremely low level, as well as longer term property values. The current surge in demand for rental properties and low interest rates may change significantly when the pandemic is under control.
Leveraging at high levels to take advantage of the current conditions could leave you in a risky position if the market changes, as we saw in the last financial crisis.
But, combining a balanced approach to leveraging with positive cash flow, a sound depreciation strategy and high-yielding property improvements could put you on track for wealth accumulation — and might even make you rich!
Aspen Woolf can help
We specialise in identifying wealth building opportunities for investors of all levels through property investment. We can help you build, and continue to build, a successful property investment portfolio or make the most of buy-to-let opportunities. If you are looking to forge your future safely and as profitably as possible, please feel free to contact us.