Imagine you buy a stock in the market. Suppose it\u2019s an expensive stock. It costs \u00a3100,000. To buy that stock, you need to come up with all the money yourself. It is your money. If you do well with that stock and get lucky, you might make 5% ROI in a year. If you\u2019re doing really well, you might match the rate of inflation of the economy (in the UK, that\u2019s currently 8.7%). You may benefit from some appreciation in the value of your capital (the money you invested to buy the stock) as the value of the stock increases with the economy of that country.<\/p>\n\n\n\n
Unless you have some executive power in the company you bought the stock from, you have no control over the value of that stock: you just sit, and wait for the market to do its thing. If you want complete control over the value of the stock, you either need to have control over every investor and consumer in the market, or you need to run the business from which you bought the stock. The former is unrealistic, and the latter – if you are to start a business – opens you up to a whole host of new risks.<\/p>\n\n\n\n
Suppose you hold that stock for the next 20 years. The company may then, to show their appreciation, start sending you a small payment per month: a dividend. It probably won\u2019t be very high, and that depends on the company doing well, growing, and not going bust.<\/p>\n\n\n\n
So, you need your own money to buy the stock, you\u2019ll be doing well if your stock appreciates in value at a rate that matches inflation, and dividends only come after decades, and even then they\u2019re small.<\/p>\n\n\n\n
Now let\u2019s look at the same situation in property. So, again, imagine you buy a stock. But, this time, it\u2019s a \u2018property\u2019 stock: you buy a house. Suppose your property stock costs \u00a3100,000. To buy this stock, you don\u2019t need to come up with all the money yourself. Typically, in the UK, banks will provide you with 75% of the cash you need to purchase the house. So, you can now get a \u00a3100,000 stock for \u00a325,000 of your own money.<\/p>\n\n\n\n
In the UK real estate market, house prices double roughly every 8 years. This means that, if you do averagely in the UK real estate market, you\u2019ll be getting a return on your investment of 9.1% per year.<\/p>\n\n\n\n
But, there\u2019s a difference between the return you get on your investment (ROI), and the return you get on the capital you employed (ROCE, i.e. the actual cash you put in from your own bank account). You didn\u2019t invest \u00a3100,000: you invested \u00a325,000 of your own capital. That\u2019s a 29.7% return on the capital you employed to start with. That\u2019s enough to make most of the stock market weep.<\/p>\n\n\n\n
But this is what happens if you just know nothing, buy a house in good condition, and do absolutely nothing with it for a decade. <\/p>\n\n\n\n
But that, of course, is not what we do. <\/p>\n\n\n\n
Firstly, we rent it out. Rental income is like dividends. The only difference is that you don\u2019t have to wait decades until the company thanks you for investing: you get your dividends very soon after investing, and the monthly property \u2018dividends\u2019 you get are much, much higher compared to the size of your investment.<\/p>\n\n\n\n
Do you already see why property in the UK market is so much more financially lucrative and safe than stocks? I\u2019m not finished.<\/p>\n\n\n\n
With stocks, you have no control over the value of your asset: you just have to sit and wait, and hope that consumers in the market like the company you\u2019ve bought from. With the house you\u2019ve bought, you are in complete control of the asset. You can upgrade the kitchen. You can add an extension. You can put in en-suite bathrooms. Adding these things will all make the value of the property increase. And, if you know what you\u2019re doing and you\u2019re working with someone trained, for every \u00a31 you invest, you can probably get \u00a32 back. So, unlike buying stocks, when you buy houses, you can force appreciation in the value of your asset by working on improving it.<\/p>\n\n\n\n
Oh, and then your \u2018dividends\u2019 go up, because you\u2019re now offering a nicer product to the rental market, so rental income increases. As a side-note, the UK property market has a really nifty feature: property value is based on the number of bedrooms, not the surface area of the land, and in house shares, commercial valuations allow you to get a valuation based on rental income. So, when rental income increases (higher dividends, which you\u2019re in control of), the value of your asset actually increases, too. But this is just a bonus I\u2019ve thrown in. Let\u2019s move on.<\/p>\n\n\n\n
Have you still remembered that, while you\u2019ve been refurbishing the property, the house prices have been increasing at 9.1% a year on average? That\u2019s still a thing. You had probably forgotten with all that refurbishing and tenanting you just did. Or maybe you\u2019re just getting on with your life somewhere else in the world while someone is putting in the blood, sweat and tears for you.<\/p>\n\n\n\n
So, right now, you might be thinking, \u201cThis is all great, Laura-Jane, but I\u2019ve got a \u00a375,000 debt I need to pay off. That\u2019s a lot of risk. I don\u2019t want to put myself in debt when I invest. How on earth am I going to pay all of that back?\u201d <\/p>\n\n\n\n
Here\u2019s the trick: you don\u2019t have to. <\/p>\n\n\n\n
This isn\u2019t normal, consumer debt: this is mortgage <\/em>debt. If you\u2019re investing right, that debt is leverage on an asset of the person you\u2019re working with, not a liability that could send you broke. Mortgage products in the UK on properties you rent out are typically \u2018interest-only\u2019. This means that, to \u2018service\u2019 that debt, i.e. to rent out the \u00a375,000 from the bank, you only need to pay interest on the loan: you don\u2019t need to make capital repayments. Suppose your mortgage interest payments are \u00a3500 per month (this might be the case, worst-case scenario, on a really, really bad day in the UK for a \u00a3100,000 house). There are 4 bedrooms, so you rent these out at \u00a3500 per room, and make \u00a32000 per month. Having only one tenant in the building means that your debt interest payments are covered.<\/p>\n\n\n\n \u201cBut, 10 years from now, don\u2019t I still have a \u00a375,000 debt to pay off?\u201d<\/p>\n\n\n\n Have you forgotten that you own the house? And now, it\u2019s worth far more than \u00a3200,000, because you upgraded it through a refurbishment, so its value went up? Suppose it\u2019s now worth \u00a3300,000. So, how do we clear that \u00a375,000 debt to the bank? Effectively, what you can do now is buy the house again<\/em>. Now, on a 75% \u2018loan-to-value\u2019 mortgage (where the bank gives you the cash for 75% of the value of the house). So the bank gives you \u00a3225,000. You use that new mortgage to pay off the old one, leaving you with \u00a3150,000 of surplus cash\u2026 and you still own the house.<\/p>\n\n\n\n TL;DR?<\/strong><\/p>\n\n\n\n When you invest in property, unlike stocks, you:<\/p>\n\n\n\n The expression \u2018as safe as houses\u2019 is no joke, and this is why. So, when you invest with someone who uses this strategy and knows how to put all of these pieces together, you know that your investment is safe, and the percentage return you\u2019ve agreed on your loan – somewhere between 3% and 8% depending on your circumstances – is safe.<\/p>\n\n\n\n So, you see the benefits. This all looks great in principle, but you want something simple. You don\u2019t want to go out buying all the houses in the UK. You just want to invest the same way you invest in stocks: hands-free, with little responsibility. You want a slice of the pie\u2026 without the hassle of owning, refurbishing and maintaining assets yourself. <\/p>\n\n\n\n\n