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4 fundamental things in property you need to know about

Last updated: 29th April 2020

Some say investing in property is easy. Others find it a struggle.

Some property investors are educated. Others are winging it.

Success very often isn’t down to luck. It’s about understanding what you want to achieve, how you’re going to achieve it and utilising the many things that can help you get there.

That’s why we’ve put together the 4 fundamental things in property that you need to know about as a property investor.

1. The power of leverage

Leverage is possibly one of the most important tools you can use in property. Essentially leverage is using other people’s money, or borrowing, to make higher returns.

Otherwise widely known as a mortgage.

Now, you could use all of your money to invest in one property with cash and buy it outright. Or, you could split that money and use it as deposits on multiple properties.

For example:

Cash: You have £100,000 and purchase 1 property outright.

Mortgage: You have £100,000 which you can split into 4 x £25,000 deposits and purchase 4 buy-to-let properties with a mortgage.

When using the power of leverage, you’ll have 4 x income generating properties and benefit from 4 x the capital growth in comparison to the single property if you would have bought it outright with cash.

If you do decide to use leverage then you’ll pay interest, however, you’ll likely more than make up for this with returns than what you’ll pay in interest.

Some consider leverage to be ‘bad debt’, but it’s actually good debt. This is because unlike some other items that you might take a loan out for, for example a car, property goes up in value so you’re actually making a profit on that debt.

Most banks will allow mortgages at a 75% LTV and you have the option to repay the interest and capital via monthly payments, or just pay off the interest, which is what most investors tend to do.

However you can get leverage wrong and there are risks to it, so you might want to listen to this podcast episode to bring your knowledge up to speed.

2. Understanding inflation

Inflation is one of the most powerful forces when it comes to property. When used, it can make you rich, but if ignored, it can make you poor.

If you don’t know what inflation is, put simply it’s an increase in the general price of goods and services over time.

The average rate of inflation since the year 2000 has increased by 2.9% each year. It might not sound much, but it makes a huge difference over the long term – and this is why it’s so important.

Inflation is created when there’s more demand for goods than there’s supply – or if there’s an increase in the money supply. When more money is introduced into the economy, prices adjust upwards

Inflation can easily make you lose money without you even realising. To avoid these mistakes you might want to listen to this podcast episode dedicated to everything you need to know about inflation.

On the other hand, inflation can contribute to your wealth creation. And if you’re a property investor, one way inflation can help is with rising prices – because rental prices tend to rise in-line with inflation.

Another way inflation helps is when it’s combined with leverage. If you choose to do this then your debt will be eroded by inflation.

For example, if you borrow £100,000 and you get an interest only mortgage, you’ll still owe £100,000 in 20 years time. But, because of inflation, that figure will be worth less by the end of the 20 years. In real terms that debt is now worth £57,000 today.

Mind blowing!

3. Understand why property goes up in value?

Most people tend to assume that property will rise in price.

And they know that it doesn’t increase by the same amount each year,

But they don’t know why.

Understanding why property goes up in value will allow you to be a smarter property investor and plan for the long-term, rather than just winging it. This of course ties in with the 18-year property cycle, if you don’t know what that is, you should take this university course. It’s free.

However, there are three factors that are behind the reason why property goes up in value. The first one being supply & demand, this is the reason why property prices go up over the long term but there are two shorter term factors that influence property prices more aggressively.

The second factor is credit. Credit is essential to the housing market as it’s needed to be able to purchase a property. Not everyone is sat on a load of cash able to buy a property outright. From an investor’s point of view, when borrowing becomes cheaper, this means you can afford to pay more for a property and still make the same percentage return.

The third and final factor is sentiment. No matter what the long term outcome is, how positive or negative people are feeling at the time will influence how people behave. If people are feeling positive, buyers and sellers are more likely to act fast, whereas if they’re feeling negative, they’re more likely to hold off.

These three factors are all in-play at the same time, and there’s never just one having an impact on the market which makes it harder to predict short term outcomes. If you’d like to know more about these three factors and the difference between long-term and short-term outcomes, you can listen to this podcast episode.

4. Work out what type of property investor you are

Without a plan, you’ll very rarely achieve much. Every successful property investor needs to have goals!

Your goals should be SMART: Specific, Measurable, Achievable, Realistic and Timed. Knowing your why will help you achieve these goals and help you to push through when times get tough.

And once you have your goals, you’ll then need to determine your strategy – how you’re going to get there.

Figuring out what type of property investor you are will help you determine which strategy is right for you.

We’ve found that there are essentially four different types of property investor:

Long-term Lou: If you’re a long-term Lou, you’ll see property as a pension and something to pass onto future generations. You’ll want to prioritise capital growth over yield as well as having a 10-year plan.

Income Ian: The Ian’s of the world are focusing on passive income. Chances are you’re looking to supplement your income and hopefully one day replace it completely with property. But not straight away, you’ll be happy to play the long game. And you’ll prioritise yield over growth.

Hands-on Hilary: If you’re a hands-on Hilary, you’ll love property and want to dedicate all of your time to it, getting into the nitty-gritty of every aspect. The perfect investment types for this type of investor are flips or refurbs because these tend to be hands-on strategies and this is where you feel most at home – doing the ‘doing’. Your sole focus is on property becoming your full time job.

Freedom Fred: If you’re a Fred, you’ll hate your job and want a quick exit route through property. You’ll want to make things happen as quickly as possible so will be raring to go with achieving your goals.

Working out what type of investor you are will help give you some focus.

If you’d like to learn more about what type of investor you think you might be, you can listen to this podcast episode, or simply head over to our homepage where you can take a short and simple quiz.

So now you’re clued up on the 4 fundamental things in property that we reckon you need to know about.

What next?

If you’re not yet clear on your goals, you might want to consider booking a free goals call with our team here.

But if you’re clear on your goals and are at the stage where you’re ready to rumble and want to discuss strategy (and see how our Invest team can help you achieve those goals sooner rather than later), you can book a free strategy meeting here.

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