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Why invest in property?

Why invest in property?

In our last post, What should I do BEFORE I invest in property? The quickest way to build wealth I highlighted that the quickest way to build wealth is via Business or Bricks. 

This article will cover why we at MVP Properties believe Property is a great asset class to invest in.

Jump straight to your favourite / desired section:

  1. Good Debt
  2. Capital Growth
  3. Forcing Appreciation
  4. Below Market Value
  5. Inflation Linked Income

1. Good Debt

If you use debt to buy an asset that puts money in your pocket, rather then take it out, this in my opinion is good debt. I won’t go into detail on risk, but it is important to note that with all debt there are risks. It should always be a considered and strategic debt that forms part of your overall plan. It should fit in with your goals

In short, secure your debt with some form of foundation. This could from different sources, in ascending risk order:

  1. Cash in the bank
  2. Income from wages / salary
  3. An insurance policy
  4. Revenue from other assets

Ultimately you need to ensure you can service that debt. 

Good debt could be termed leverage.

The benefits of using debt to buy a property?

It costs you less money to buy a property using leverage. I won’t go into this in detail (the full education package on leverage, which isn’t just financial, can be found in our Bronze client area and above) but basically it is costing you a fraction of the cost to buy an income generating asset. This comes in the form of a mortgage. Typically, this will be a loan for around 75% of the property value. 

That means for a property worth £100,000, it only costs you £25,000.

2. Capital Growth

Property prices go up over the long term due to a few fundamental reasons.

Supply and Demand

If there is more demand then supply then prices go up. In the UK we haven’t built enough houses to meet demand for the last ten years. Every year we have missed the requirement for new houses, the demand increases. The UK is a relatively small island and we only have a finite amount of space, compounded with a growing population this equals increased demand. This largely increases prices over the longer term.
 

No recent government has ensured enough homes were built to keep up with demand.

In 2014 Doctor Alan Holmans, a housing expert at the University of Cambridge, produced new estimates of the housing gap. They were based on 2011 data but took housing conversions, second homes and vacancies into account.

His report indicates that we need to build about 170,000 additional private sector houses and 75,000 social sector houses each year.

A total of 240,000-250,000 houses each year. This excludes any reductions in the existing housing stock.

House building since 1920s NOV 17

The economy (Inflation & The Property Cycle) and:

Access to Lending

The availability and price of lending (mortgages) is essential to the economy of the housing market. This isn’t something most people think of when you ask “why do house prices go up?”. 

In 2008 prices fell just after the crunch, because people couldn’t get mortgages, banks did not want to lend on property at that time and were been extremely cautious therefore prices dropped. Credit simply dried up. That resulted in a lack of buyers because *most* people use mortgages to buy property. The full education package on leverage can be found in our Bronze client area and above.

The availability and rates of lending also determine the cost of renting vs buying. If borrowing is cheap then buying a home as an owner occupier is cheap compared to renting. This results in more buying, creating more demand. This demand raises the price of owning until owning vs renting costs the same again.

As an investor when credit is cheaper we can on paper afford to pay more for a property and still make the same return. This lower cost credit supports higher house prices. 

Fear & Greed

Emotions. In the short term any excessive positive or negative attitudes are likely to effect what people do at that time regardless of any established trends. 

An investor who believes prices will go up will be happier to pay higher prices and an owner occupier with a positive outlook will stretch themselves and take on bigger mortgages and pay higher prices for property.

The converse to this, if the attitude is that the property prices are falling or there is a negative attitude to the economy then people tend to hold off in buying and this starts to create flat or dropping prices in the market. If sellers think they aren’t going to get the price they want they won’t sell and these can play into each other and have a big impact on prices.

Supply and demand, access to lending and fear and greed are all linked together. They will both increase and decrease property prices. 

Most of us struggle not to become influenced by the short term sentiment, but this is one of the core values we teach at MVP Properties. The long term is what matters and is what is going to make you wealthy. If you create goals that support and work alongside longer term trends then we can overcome short term fear & greed. Education is the first step to recognising when you are been influenced by short term attitudes and avoid making costly mistakes.

Rents

It may come as a surprise but rents actually have the most influence on property prices. 

If you’re not an owner occupier then rents are what you would have to pay to live in a property and rents are our income if we are a property investors. 

So what determines what we can afford to pay for rent? Wages. A portion of our wages are allocated to our rent, or our mortgage. If our wages go up then we are willing to pay more for either the rent or the mortgage. And rents will increase because wages will go up (inflation).

3. Ability to Force Appreciation

Property is one of the only assets that can in a very quick time frame be forced to increase in value. 

This can be done through refurbishments, extensions or additional planning. The most important bit however is that property can be refinanced at the new value maximising the benefits of leverage.

This is an independent topic and will be something we will cover in more depth in the future.

4. Ability to Buy Below Market Value

The nature of property prices and the time frames over which prices rise and fall, there is the ability to buy assets at different prices to what the market values them at. Consider the fear and greed element, consider the economy and how this effects employment. It is a fact that sometimes, assets need to be sold at a lower price to release funds due to some other financial burden that needs to be settled. Circumstance can create motivated sellers. 

The availability of off plan properties at a discount can reep huge rewards. Keep your eye out for a full article on this topic alone.

 

5. Inflation Linked Income

As a property investor rents are our income.

Although this won’t be exactly in line and may lag slightly, broadly speaking rents track inflation. 

A Hometrack report for Q4 2019 reports an 8% increase in rental demand over 2019. The combination of static supply and rising demand results in upward pressure on rental values. Interestingly the growth in average earnings has outpaced the growth in rents for the last three years. 

What does this mean? The amount a renter is willing to pay will be subject to the amount they earn, or a proportion of . This doesn’t happen instantly and bank balances take time to adjust, therefore rents will not instantly increase month on month. Rents are generally increased either at a tenancy renewal or at most once per 12 month period. Rents will therefore lag slightly.

regional picture growth
Source: Hometrack Rental Market Report - Q4 2019

The regional picture (Q3/Q4 2019)

Direct from the report: “In Bristol and York, the relatively high cost of buying a home is likely to be supporting rental demand and, in turn, rental growth; in Nottingham, demand for renting has grown faster than the national average over 2019.

Despite the overall pick-up in rents at a national level, there are three cities where rents are falling – Aberdeen, Middlesbrough and Coventry. In Aberdeen, rents are falling at their lowest rate for 4.5 years as rental supply starts to reduce.

Rental growth in Middlesbrough is also weak – as is the case across the North East of England – as weaker employment growth and affordable home ownership keep rental demand in check.

Weaker growth in Coventry is in contrast to the period between 2014 and 2016, when rental growth raced ahead by 5-10% per annum stretching affordability levels.”

Summary

Property has made many people obtain financial independence. Will you be one of them?

MVP Properties considers all of these factors when negotiating opportunities. Our investments are chosen where on both a national and a macro level all of these factors result in opportunities for freedom, flexibility and wealth.

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