Seven Step Plan

The ability to leverage (Gearing)

Since 1957 property prices have increased on average at 11.3% a year (source: land registry). Despite growing at approximately the same rate as the stock market, investing in property would have produced several times the returns the stock market

would have produced. In essence, property works the same way as any share investing - Compound Capital Growth. Compound capital growth is such a powerful concept that Albert Einstein called it “the greatest discovery in the universe”. If you invested £5000 each year from 1975 to 2000, you would have invested £125,000 in total. These are the returns that would have accrued from traditional investments. From this example it would appear that shares are an excellent choice. That is, until you realise that that the same £5000 invested in property is likely to have produced a return in excess of £5,000,000. That’s 7 times greater than the stock market! If you invest £100,000 in shares you are buying assets worth £100,000. If you achieve 10% growth in your first year, your profit is £10,000.

On the other hand, if you put the same amount into property, typically you would use that money as a deposit to purchase an asset (or several assets) worth, say (for simplicity’s sake) £1,000,000 and use the bank’s money, in the form of a mortgage, to finance the rest of it. You, therefore, have an asset worth £1,000,000, working for you. If that increases in value by the same 10% over the next year you will have made £100,000 - ten times more than the equivalent stock market investment.

Greater Investment Security

The fact that the banks will lend you money to invest in property (at the lowest loan r

ates available) but will not readily lend you money specifically to invest in shares, oil, gold, diamonds, fine wines, or other investments should make something very clear to you – i.e. that the banks consider property to be the most secure and stable asset there is. Regardless of the doomsayers in the press and what happens in the market on a monthly basis, long term, the banks acknowledge that the underlying market pressures of supply and demand mean that property prices will continue to rise and their money is protected. If you have owned your own home for several years, or know some one that has, you will know first hand how the capital appreciation has grown.

But what about a crash in house prices?

The press love stories about an imminent house price crash. Such headlines sell newspapers and hence appear with predictable regularity. Look beyond the headlines to the real long term statistics and you will realise that a property bought at the height of the market in 1989, before the “crash” of the early nineties (where prices fell by less than 10%), is now worth 3-4 times its value then. Provided you ensure you have positive cash flow from your properties, you will not be forced to sell if the market turns and can simply wait for the inevitable upsurge in prices to occur. There really is very little need to fear a crash.

The ability to make instant profits (At the point of purchase)

If you buy £100,000 worth of shares they are worth, at that precise moment, £100,

000. You pay the exact market value. However if you pay £100,000 for a property the fact is that the property may not be worth £100,000. If you have bought it wisely, at below market value, it may be worth £115,000 or even £130,000. This is how we purchase off plan or completed property at reduced rates due to the quantity of property we reserve with developers. If purchased wisely property investment therefore enables you to get an instant return on your investment.

Beating the law of averages

"There are lies, damn lies… and then there are statistics"

It is well documented that only a small number of managed funds beat the returns an investor would have achieved from simply investing in the FTSE 100 (and even then by only a small margin). If you want better than average returns then you need to be a better than average investor. It’s much easier to do that with property than the stock market. With any investment, you need to look at the average returns you can expect and ask what the chance of beating those averages? If you compare share market growth with property market growth over the last 50 years you will see that both have grown at a fairly similar level. However, the average stock market price has fluctuated to a much greater extent than the average property price.

Property growth has been fairly uniform. That means that whatever property you buy, it is likely to increase, by approximately, the area’s average over the long term. The position with shares is much less certain. Now for an investor, this is a crucial point to recognise: if in a town there are 1000 houses and 999 of them have increased in value by 10%, what are the odds that the 1000th one has also gone up by 10%. Clearly, they are very high. The reason for the fact that property values in an area rise in unison is down to market forces. If a property is priced too highly, buyers will simply choose to purchase a different one which conforms to the average market value.

This is clearly not true with shares: just because 999 shares in any one sector rise by 10% does not mean the one you chose to invest in will also rise in value. Knowing averages does not help you choose well performing stock, but it is an excellent guideline with property.

Long Term Stability

This is a vital factor for someone who is employed and not a full time investor. If you trade currencies, for example, even a few minutes lapse in attention can be critical.

Actively trading stocks is likely to require at least daily monitoring of your position. Share prices can collapse in the space of a few hours, but due to its illiquid nature, property prices are unlikely to move at most more than a couple of percent a month. Further the housing market is underpinned by the fact that people need somewhere to live. It is an essential of life. If prices start to fall, fewer people choose to sell. Thus supply quickly reduces and demand stabilises prices. This fact is often ignored by analysts who view the housing market in the same way as other markets, when they make their boom bust predictions.

All in all the property market is very stable. Provided your property is being managed, you could take a 12 month cruise and in all likelihood, when you come back, nothing much will have changed in fact you are more likely to have made an increase in wealth from the Capital appreciation of the asset. This is highly appealing for the part time investor.

Adding value yourself

When you buy shares in a company, there is relatively little you can do to improve the value of those shares. The directors may be willing to consider your suggestions but your input is likely to be extremely limited.

With property, you have the option to use your knowledge and intelligence to make all sorts of accommodation improvements that will increase your asset’s value by several times the cost of those changes. It is, therefore, of greater appeal to the person who is confident in his own abilities.

Releasing capital whilst retaining the asset

Imagine you have made a profit of £100,000 from your stock trading. If you want to release your capital gain, the only way to do it is sell part or all of your shares. Either way, you will face capital gains liability and lose the value of the shares you sell. They will cease to work for you.

The converse is true with property, where you do not have to sell your asset to access your gains. You are able to refinance the property, thus releasing capital. That way, your asset continues to work for you both in terms of growth and income.

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