Control – the difference between property and all other investment assets
When you invest, you do so with the aim of paying for the lifestyle you want to achieve – as I discussed in my article encouraging you to keep it simple with the property investment lifestyle ROI method.
When we meet with people who are considering investing in property for the first time, and then when we meet existing investors to review property portfolios, we spend a lot of time discussing lifestyle goals. We want to understand what makes you tick, what drives you forward so that we can help you decide whether property investment is the ideal vehicle to get you to your destination.
Over the next couple of weeks, I’m going to publish a series of articles that will help you decide your goals as an investor. While these will, of course, lean towards property investment, they are suitable for all investors. I’ll be covering:
- What investment is right for your personality, when I examine how to measure your investment risk and tolerance before investing in property
- Investment risk, and how to reduce property-specific risks
- The first step to making a successful investment, by looking at the investment calculation that defines long-term success as a property investor
- How to remove damaging emotional bias from your investment decisions, by acting like a professional to pump up profits from property investment
In this first article in the series, you’ll learn about the mechanics of wealth creation by property investment.
Why do you want to invest?
Stupid question, right? Because the answer is, of course, to make money to build your desired lifestyle.
Now, you could go out and get another job to make more money, but that’s not going to give you the lifestyle you want now. Working more hours will destroy what little rest and relaxation you get today.
You could, I suppose, go and rob a bank. The trouble with this is that you’ll probably find yourself with plenty of time to relax, in a room you couldn’t swing a cat in and paid for by Her Majesty. I wouldn’t advise you take this route.
This leaves investment as the best option open to you. What you need to decide on is the best vehicle for investment.
How do you profit from property?
At its most basic, the way that you make money from property is very similar to how you make money from other assets:
- You make it passively – without having to put in a lot of effort
- Someone pays you an income for owning the asset – in the case of buy-to-let property, this is rental; in the case of shares, this is dividends; and in the case of bonds and cash, this is interest
- Over time, the value of the asset rises – giving you a profit on your capital when you sell
- By combining income and capital growth
What is income?
Income is a reward for owning an asset today. When investing in property, that reward is the rent paid to you by your tenant. They are rewarding your foresight in making the investment. They are rewarding you for providing a well-maintained property as their home.
You should aim for the rent to cover the costs of owning your property, though you may be prepared to wait a couple of years for this to happen. Over time, your rental income will rise as you increase rents. You may decide to use this rental income to pay down the mortgage, or to invest in other properties, or to boost your lifestyle.
What is capital growth?
For many investors, capital growth is the main objective. Over time, the value of a property should rise – for example, over the long term in the UK, property prices have, on average, doubled every eight to 10 years. The reasons for this are many but include inflation, wage growth, population growth, and the fact that land is in limited supply. Companies can create more shares (and often do). You can’t magic land out of thin air.
Of course, property prices fluctuate. The go down as well as up, but, by researching location and property investment opportunities carefully, you should be able to pinpoint the best places to invest in property UK and maximise your profits.
Property is different from all other investment assets
While the methods of profiting from an investment in property are very similar to how you profit from other investment assets, there is one thing that sets property investment apart from all other choices. In a word, control.
If you buy shares in a company, or invest in bonds, or put your money in the bank, you give up control over your investment:
· Shares
The return on shares depends upon the decisions made by the company’s management. They decide where to invest profits, what to invest in, and their business strategy. If they make poor decisions, the company makes fewer sales, profits slide, dividends get slashed and the share price collapses.
· Bonds
When you buy bonds, you are lending money to either a company or a government. In the case of corporate bonds, pretty much all I’ve described for shares holds true. If you buy government bonds, you get a ‘fixed’ rate of income – set by them. It shouldn’t go down (though the price of bonds will, should interest rates rise), but it won’t go up, either. And when have you known a government to be generous?
· Cash in the bank
When you deposit cash in a bank, it is the bank that decides what you earn on your savings. And banks, like governments, aren’t generous. If they were, they wouldn’t be able to pay their CEOs those fat cat salaries. Cash in the bank is great to keep for easily accessible emergency cash. It’s a sure-fire loser when it comes to keeping up with inflation.
· Property
So, we come to property. You are in control. You decide where to buy. You decide who to rent to. You decide who will manage the property. You decide how much rent to charge, and can take action to increase rentability by adding to the features of the property (for instance, by furnishing your buy-to-let property).
Property gives you the control over potential income and capital gain that other assets cannot give. While the methods of profiting are the same (income or capital gain), the mechanics are different.
In my next article in this series, you’ll learn how to decide whether to invest for income, capital growth, or both and how to determine your own risk tolerance. In the meantime, if you’re already chomping at the bit to discover how property investment might help you achieve your lifestyle goals, book your property investment strategy consultation by contacting Gladfish today on +44 207 923 6100.
Live with passion and fun,
Brett Alegre-Wood
