Many people consider investing in property while also wondering if they should invest in the stock market for better returns. The truth is that there’s no right or wrong way to invest your money but you should be aware of the risks.
Investing in Property
When you invest in property you should be aware of leverage. Leverage is a way of utilising debt so you can finance the acquisition of an asset. You can use leverage to invest less money to generate a greater return on your investment. This is something that cannot be done with investing in other asset classes such as the stock market.
You should also be aware of capital growth as property values have traditionally doubled every decade. However, this is not always the case even though house prices in some parts of the UK have increased by as much as 21% within the last 5 years. While you are not guaranteed to see an increase in house prices you’re more likely to see that increase than if you were to invest in the stock market, for example. In addition to potential capital growth investor will also have rental income on top of this to repay the buy-to-let mortgage and building equity in the property.
Another facility that property investors are aware of is what is known as ‘Gearing’ which follows on from leverage and can be applied across a portfolio of investments. This relates to the strategy you use to invest your available money in property.
For example, you may have £200,000 to invest in a property. One strategy is to invest the full £200,000 in a house worth that value. If the property market in that area increases by 15% in the following couple of years that property is now worth £230,000 creating a £30,000 pre tax profit.
Instead of investing all £200,000 in one property investors could choose to invest in 4 similar properties worth 200,000 with a £50,000 deposit and the rest made up by a buy-to-let mortgages. With a 15% increase in local values the property value would now be worth £920,000 creating a pre tax profit of £120,000.
Investing in Shares
Investing in shares could be a good option for you if you want to enjoy a long-term investment. However, shares are often a lot more volatile and risky than property so you need to be aware of the risks.
Share prices can go up as well as down but over a long period of time, there’s always a chance that they could provide some good returns. Most shares will offer dividends which may be paid out twice a year. The dividends are paid out when the company you’ve invested in has made a profit.
However, as we have previously seen, shares can be quite risky as prices can and do drop at a moment’s notice. Therefore, if you wish to invest in shares you should be prepared to lose cash from time to time.
If you are looking for a more stable form of investment then it may be wise for you to invest in property. People are always going to need homes, especially if they are located in cities that are growing.