Have you ever wondered why so many people are interested in buying property? Especially if you can buy a property using none of your own money, get paid for acquiring it, and earn a positive monthly cash flow from your investment. Now how many other forms of investment allow you to do that?
Many people like to dabble in the stock market. Some people are very successful at this. So if you are investing £100,000, this will buy you £100,000 in shares. A rise of 10 percent means you will earn £10,000. Not bad?
Well, if you spend £100,000 on a property, and let's say you buy it the traditional way for the moment, then you'll be borrowing a further £566,667 (85 percent) from a mortgage lender and pay a deposit of £100,000. Now say this too goes up 10 percent. How much have you made? 10%? No, actually you have made £66,667 on your £100,000 investment, so a return of 67 percent.
So which would you prefer, a return of £10,000 by investing £100,000, or a return of £66,667 by investing £100,000? 10% or 67%? Property wins, right?
This is the power of leverage. Property is such a powerful class of asset that banks and building societies are prepared to lend 85, 90, 95 percent and now even more—some have offered 125 percent of the value of the property so that you can buy it.
It's amazing that Rich Bank Plc will lend you 85 percent to buy a £100,000 house, but they won't lend you 85, 50, or even 10 percent to buy some Rich Bank Plc shares!
Do the banks know something we don't? I think they are telling us that over the long term they think property is a fairly good bet; this is why they'll lend you a high proportion of the value of a property at a relatively low interest rate. If the institutions believe in this investment, then rest assured so should you.
We understand that in the basic description above we have not included legal fees, conveyance fees, etc., but we have simply shown the power of leverage. Why? To show you how property as an investment is such a good form of financial development. Once you understand this, you can then learn how to run your investments as a business, how to make it more efficient, how to understand tax, how to leverage even more, how to negotiate better deals, etc. |
