The fundamentals of property investing

When you ask most people what their best investments were, they would generally say property.

Property is a medium to long term investment

Property is a fairly illiquid asset class which means that it takes slightly longer to sell than holding shares or precious metals like gold. The transaction costs and taxes are generally higher. For these reasons it makes sense to hold on to the properties for a longer period of time.

Residential property prices in the U.K typically double every seven to ten years.

Use the banks’ money to make money

It makes sense, in most cases, to use bank loans to improve the profitability of your investment. For example, if you can obtain a loan at 3% interest and the property you purchase makes 8% income, then you are 5% better off in using the banks money. Obviously, if bank loans become more expensive then it would make sense to pay your loan off quicker.

Return on investment           

The other advantage of using bank finance on buy-to-let property is that it can improve your return on investment. For example, if you purchased a property worth £200,000 with a £50,000 deposit and the property price went up 10% in two years. You would actually make a 40% return on investment (ROI).

Return £20,000 = 40%
Amount Invested £50,000
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Time value of money

Each year the price of goods and services increases by the rate of inflation. £100 today will not buy you the same amount of goods and services that it could a year’s time. This should work in your favour because your mortgage is taken out at today’s price while each year your rental income increases. Residential property values should increase over time while mortgage values are decreasing in real terms.

The price is determined by supply and demand

In areas, like Manchester and London, there has been a greater demand for property than the supply of property on the market. The relative shortage leads to a sharper rise in property prices as buyers increase their bid prices in order to secure their desired property.

Since the release of the Barker Review of Housing it is well known that the target number of houses to be built across the U.K is 250,000 new homes per annum. According to the government department of communities figures of 25 Feb 2016, more than 143,500 new build homes were started up to December 2015. This is still well short of the number of new homes that should be built and thereby continues to make UK buy to let property an attractive investment.

Download our free guide on investing in UK buy to let property

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