Fri 11 Dec 2015
Property investments take many forms, from pooled funds to buying a house to live in or let out. In this article we focus on the benefits of Buy-to-let investments; highlighting both the risks and rewards.
Direct property investment includes:
Buy-to-let: You can purchase property with a view to letting it – this would give you both an income, in the form of rent from a tenant, as well as capital growth if the property is sold for a profit.
Property development: Alternatively you can purchase property directly with a view to renovating it and selling it for a profit.
Buy-to-let: the potential for high returns:
An important aspect of Buy-to-let which makes it an attractive option for investors is typically you only invest a portion of the funds and the balance can be borrowed as a mortgage.
However, if the value of the property goes up, you benefit from the increase in its total value even though you have only paid for a portion of the property. This gives you the potential for high returns.
To put this into perspective, if, for example, you have £25,000 to invest, you could choose to buy shares, or alternatively you could use the money as a deposit to purchase a £100,000 house.
If shares go up by 10%, you stand to make £2,500, 10% of your original investment. However, if your property goes up by 10% you stand to make £10,000 – 10% of the total property value, but a 40% return on your investment.
However it should be noted that there are many costs that need to be considered when purchasing property, and it is also important to remember that the value of property can go down as well as up, although over the long-term it tends to go up.
Property investment needs to be viewed as a medium to long-term investment – a minimum 7-year investment period is usually recommended.
Risk and return:
The amount of rent you can charge varies according to a number of factors, including wider market trends outside your control. Rents are not guaranteed.
- If you can’t find tenants – or if you can’t charge the rent you expected – you may not be able to cover your mortgage repayments.
- If house prices fall, the value of your property is likely to fall as well. You may not be able to sell it for as much as you hoped.
- If you have to sell and the sale price doesn’t cover the whole mortgage, you’ll have to make up the difference.
- Major repairs or difficult tenants may increase your costs – and trouble – unexpectedly.
- If the housing market does well, you may be able to sell your property for a profit.
At John German Estate Agents we have experienced and trained staff along with independent mortgage advisors on hand should you have any property related questions. Please feel free to contact your local branch where we will be more than happy to assist.
For more information on Buy-to-let click here.
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