There are a whole host of investments out there, each with unique risk, liquidity and feasibility characteristics. I firmly believe in diversifying your portfolio, but for this post I want to share why I’m a fan of property investment and think that it’s something everyone should and can invest in. Not forgetting its an actual physical asset you can touch and feel – here are my 6 reasons;
Steady income with tax deductible expenses
The rental income you get on property investment provides a source of steady, passive income. This is unlike equity investments where not all companies pay out a dividend. In addition, you have control over the property (i.e choice of tenants, renovation, structure) whereas with equities – you have a negligible, if any influence over the strategic, operational or financial decisions of the company!
Owning a rental property is like owning a business, in that pretty much all expenses related to running the property are deductible from the rental income – which lowers your tax bill. Of course, there is no escaping property taxes but you can be smart and optimize your tax deductible expenses….legally.
Tenant pays down your mortgage
Most people take out a loan secured on their rental property, i.e. a mortgage – in order to purchase the property. As part of the loan, there will be monthly payments – which will include a mixture of loan repayment and interest. To service these payments, you rent out the property to earn rental income, and essentially this income covers the monthly mortgage payment and (hopefully) leaves a surplus/profit every month.
So basically, your tenants are paying off your mortgage. As a result, your outstanding loan reduces and the interest on that loan becomes lower (due to a lower loan balance). In time, you may increase the rent due to either a buoyant rental market or through your additional work/renovations you carried on the property.
Through this combination of lower monthly loan repayments and higher rent, your profits and cashflow increases. Eventually you want to get to a position where your rent pays off the entire mortgage, and you no longer owe the bank. This takes time, but it can be sped up with lump sum down payments where possible. T
The aim should be to get the property free of debt – making it a low risk, high return strategy in the long-run.
Property prices like most markets are subject to economic cycles and the micro-economics of supply and demand. However if you are prepared to stay invested in property for the long haul, you will find that the real returns of property are positive, i.e. after adjusted for inflation effects – the rental and capital appreciation of a property exceed the inflation rate.
This is not the case for all equities or fixed income investments. For the last 40 years both the US and UK residential property market returns have exceeded the rate of inflation. This particularly is due to the progressive increase in property prices rather than rental yields. Of course, the returns vary within regions, and that’s where location becomes a huge factor in your property investment strategy.
Sail through those economic cycles
Consider these economic scenarios that illustrate that if held over the long term, your property investment is a safe bet:
- Low interest rate environment => Cheaper to borrow/refinance mortgage => more house purchases => house prices increase. GOOD FOR LANDLORDS
- Higher interest rate environment => More expensive to borrow => fewer house purchases => mortgage payments higher => people more inclined to rent. GOOD FOR LANDLORDS
- Supply of housing exceeds demand => House prices stagnate/reduce => more purchases due to lower prices => eventually pushes up house prices. GOOD FOR LANDLORDS.
- Demand for housing exceeding supply => Can be good for house prices, rent or both. GREAT FOR LANDLORDS!
Of course, the above is just a basic implication model, and there are other factors that can contribute to the housing market, i.e. regional housing micro-structure, global credit event (i.e. Credit Crunch of 2008-2010), rental ceilings, property taxes etc.
A key feature of property investing is the ability to benefit from ‘leverage’.
For example, to buy a £200,000 property would cost you just £62,000 (assuming 25% mortgage, £5k refurb, and £2k legal costs) rather than the full £207,000.
If the property price then increased over two years to £250,000, upon selling the property you’d receive £100,000 (£250,000 – £150,000 outstanding mortgage), a phenomenal 61.2% return on cash invested, while also receiving rental income.
While this is true, the reverse also holds. If the property value declines from £200,000 the investor experiences negative equity and his/her loss on investment is also amplified due to leveraging (borrowing).
Of course, the recent stamp duty changes and tax laws introduced by the UK Government on buy-to-let property has significantly reduced cashflow for landlords. As a result, investors have become less incentivized to acquire further properties fulfilling the Government’s intentions. Despite this, there are still many property investment strategies available to investors, including;
- ‘Flipping’ (developing and selling the property in the short term)
- House in Multiple Occupation (HMO)
- Short-term lets including Air-BnB
- REITs (Real Estate Investment Trusts)
- Crowdfunding (see below)
On a budget…try Crowdfunding
Owning properties is great, but with the higher deposit requirement for buy-to-lets or rental properties, it means you can have a lot of capital tied into one property…not forgetting the taxes and any refurbishment costs.
Real estate crowdfunding allows you to invest in real estate along with other investors, usually through a platform that will propose real estate deals and take care of all the work, like listing deals, doing all the legal work, and then managing the property. This allows you to invest as little as £1,000 into a residential or commercial real estate project for potentially 8 – 13% annual returns based off historical data.
This beats the return from £1000 in your savings account! With real estate crowdfunding investing, there’s also physical asset that’s backing your investment – similar to direct investing.
In addition, crowdfunding is great for people who want the hassle of tenants or renovations and essentially want a ‘hands off’ approach once the investment is made.
Essentially, it allows an investor to invest in a variety of property deals (residential, commercial, industrial) with a much lower capital injection. Click here for a list of recommended crowdfunding platforms.
What about the recession?
The last recession in 2008 onwards was driven by irresponsible lending to house buyers, complex credit products and greed. On top of that, the banks and lenders had rubbish capital buffers and so suffered wild losses – and had to be bailed out, severely affecting the markets, economy and consumer confidence. This time around there is more regulatory scrutiny over financial products, lending and bank capital adequacy. In other words, we are unlikely to see large corrections in house prices – although that’s not to say they won’t be affected.
Consumer confidence is hit in a recession and people are less likely to spend and invest, which reduces house prices. And the property investor needs to be prepared to ride these out – especially if s/he doesn’t have a need to sell. Note that a recessionary environment also provides opportunity to purchase assets at a discount!
I would always recommend investing in property for the above reasons. Refer to Global Property Guide for a useful source on property trends, statistics and news across the world. As mentioned at the top of this article, rental properties should form part of a diversified portfolio thus aiming to spread risk. Of course, all investments should be entered with a thorough due diligence.
Property investment is a great way to generate a passive income. Another way is through a profitable, online business. If you are keen to learn about setting up an online presence, developing unique digital marketing skills and generating an impressive income online, click here to get started!
After working in the corporate finance sector for over 13 years, I’ve had some realizations when it comes to money and wealth. An employee, even a fairy well-paid employee may struggle to truly create the life that he or she desires from their employment alone. You see, I define financial wealth as having the capacity to acquire those dream assets, like the house or the car or the holiday home abroad with just cash and no loans or mortgage.
When I was a kid, I always viewed owning the £1m house as being the benchmark for being truly wealthy. Of course, with inflation a £1m house today may be worth £5m in the future – and in that same future, £1m doesn’t buy you alot. But essentially everybody’s dream home and desires are different. I just use a home as an example because it is almost always the biggest ticket item people want to purchase.
And I specifically selected the salaries of a UK and US Investment Banker as they are the highest paid professions in Finance, and I want to illustrate that despite their earnings and status – it’s harder to acquire that £1m (or $1.5m) house with CASH ONLY – no mortgage.
I’ve put together 2 tables – one for the UK Banker, and one for the US Banker. The tables show how with age, the banker’s savings accumlate alongside the change in house prices.
This is only a model, and I have inserted my assumptions below each table – the key being that both bankers save away 20% of their annual salary;
UK Investment Banker financial path:
US Investment Banker financial path:
From the UK table, it would take the employee (starting at a £40k salary) 34 years before they have acquired enough savings (£3.49m) before they can afford that same £1m house – which is now valued at £3.316m after 34 years.
From the US table, it would take the employee (starting at a $60k salary) 42 years before they have acquired enough savings (£13.12m) before they can afford that same $1.5m house – which is now valued at £12.958m after 42 years.
This line graph summarizes how the accumulated savings largely lag the house value over time;
You may look at my total compensation figures and find them to be conservative. But you gotta bear in mind the economic cycles, burnout and structural changes to the industry. Again, this is purely a model with my own researched assumptions. Even, the savings rate of 20% is an average. Some people save almost nothing and purely rely on living pay check to pay check.
Of course, after 34 or 42 years, and with that kind of savings, the banker may choose to buy a property elsewhere where there is more value for money or even downsize. But, the point is that, upon seeing their dream house (valued at £1m or $1.5m) when the budding banker was 21, it would take them a helluva time before they can pay for it outright in cash.
Sure, the banker can still take out a mortgage to make up the shortfall at any time during his career to buy the dream house. But it would just mean continuing to work for another 10 or 15 year to meet the mortgage payments.
The above data illustrates that an employee (with no other investments or income sources), will struggle to purchase their dream asset if they were paying for it in cash. However, being an Entrepreneur and owning several businesses and sources of income can help you achieve this goal.
Sure, the business owner may not pay himself much in comparison to the earnings of a top ranking Investment Banker, however the benefits of having multiple sources of income are as follows;
- Not subject to economic downturns as much as an employee, who may lose their job. The Entrepreneur can rely on other sources of income if one or two take a hit;
- Not working for anyone else. Be your own boss. As a result, take as much time as you need off;
- As a business owner, you have controlling ownership in your company which leads to my next defining point…
- More chance of huge cashflow or liquidity events. What this means is that one of your businesses could eventually be sold or partially sold for seven-figures if it’s a successful venture and has been creating huge value for customers. Alternatively, a minority stake in your overall portfolio company can be sold to investors. These events create huge windfalls and allow the Entrepreneur to purchase those dream assets much earlier. And they don’t have to one-offs either.
- Another benefit of entrepreneurship is the incredible satisfaction you gain from creating something out of nothing. Having the freedom to do whatever you want provides for tremendous happiness as well.
I highly recommend that everyone should start their own business, and in particular – an internet business to leverage the lucrative digital economy. There are so many ways to make money online (refer to my post to ‘4 Realistic Ways To Make Money Online‘) as well as;
- Blogging (written and video)
- Online training courses
- Downloadable templates
- Video subscription
You definitely need to start by creating your own website, create a blog and build your brand and potentially access over three billion people online. And you can do this so easily and cheaply these days.
If you would like to make the first step to creating your online business, and learn how to market effectively online, click here to access a free video series workshop that will really open your eyes to the possibilities for making money. You will wonder why you didn’t start this process earlier! In fact, that’s something I always ask myself, especially having gone through the traditional route of academics and employment.
If you wish to get started now – take the first step to your freedom my friend.
Best of luck
For many people, making money online represent the ideal way to live a life of freedom from having more time and choices. But at the same time, there’s a misconception that you need to have wonderful technical skills, a flashy website, an in-demand and hot product, a support team and a warehouse to house stock. And so, as brilliant as it sounds, an online business sounds like a pipe dream to many.
The internet is full of great ideas for creating wealth, and some not-so-great ones. As with anything, each avenue or path requires an investment of your time and resources in order to launch it, make mistakes, learn, implement and repeat. The thing is, a lot of people overestimate what they can achieve in a month, and underestimate what can be achieved in a year. In other words, consistent work over the medium to long term is required to make an online venture profitable.
As a serious online entrepreneur myself, I want to give you my view on the 4 modern ways to make money online;
Create your brand and sell it on Amazon
The market-place is so fragmented these days. It used to be that there were a handful of names or go-to brands if you wanted to buy a certain product. People are less brand-conscious and are willing to consider other brands if the product meets their quality and price needs.
Amazon has certainly helped change the landscape. Amazon is comprised primarily of individuals and small companies as the Amazon platform has enable them to efficiently and effectively brand, market and sell their products. And it’s so easy!
If you wanted to start a clothing business, i.e. gym-wear, you can easily design and brand the product using a supplier from China or Turkey for example, and get it drop-shipped (i.e. no need to hold stock in your garage or bedroom!) directly from Amazon’s warehouse to the customer when you make the sale on Amazon.
Of course, marketing is key when selling anything. The community that I am part of offer extensive training and support from world-class marketers for;
- Developing your brand and product
- Sourcing your product efficiently
- Identifying a target market
- Marketing and selling to that target market using Amazon.
If you’re more than interested in this type of business (i.e e-commerce) – which by the way, is highly profitable if done properly, then I urge you to click here and watch a free video series workshop where my mentor Stuart Ross walks you through this type of business.
Affiliate marketing is where you advertise other company’s products and services in return for a commission. There are a range of affiliate companies, i.e. ClickBank, Commission Junction where you can source products and proceed to advertise on your own site or blog. Other large vendors such as Amazon also offer a terrific affiliate marketing program. Essentially, you need to ensure that the products and services you promote are congruent with the niche or sector of whatever you offer. So if you’re a photographer, you may advertise certain cameras or camera bags on your site – and pick up commission if the reader clicks on the affiliate link and buys that product. Note that you should have used that product or service before and would highly recommend it.
This type of strategy is fantastic for individuals that are time constrained, maybe because they have a full-time job or a family. Additionally there is little ‘after-sales’ work required. So it suits an employee who works long hours or has many other commitments, and is seeking passive income.
There are some affiliate programs that pay large or ‘high ticket’ commissions. In fact, if you are keen to learn more about the benefits of Affiliate Marketing so that you can create a passive income from high ticket commission and leave your full-time job – I would highly recommend you click here to watch a free video series workshop to develop these skills.
Online courses (inc. ebooks)
Did you know that according to research firm GI Analysts, global e-learning revenue is expected to be grow to $325bn by 2025? With so many people opting for an online course due to its accessibility, wide range of options and ease of assessing course ratings/credibility – you can see why its a great option. And surely, you’d want to be a part of that $325bn revenue?
You may be asking, “what could I possibly teach?” Or you may well have a skill-set already. What is more relevant though, is what would your market want? If you identify a subject-matter that there is no course for – approach with caution. You see, you’d want to start a course for which there is competition! Because that means that people are interested in that subject/skill, i.e. there’s a demand for it that will probably last for a long time. Essentially people buy courses because they have a problem or pain that they can’t solve. So its worth doing your market research.
Why? Because once you’ve identified that people want to learn/know, then you can spend the initial time and money to develop your course, price it at a suitable level based on the value provided – and then minimal (or no) work is required from you on the course content after that. It’s passive income coming in every month – which could soon become substantial IF you market and promote the course well enough.
The course can be in the form of video, slides or an ebook. I would recommend Teachable as a great resource for creating online courses.
Have you noticed when watching certain videos on YouTube that the host would drop in (sometimes more than once) products that he or she uses, and would recommend you buy? Essentially, the host (if they have a large following/subscriber list) will have been approached by a brand (say men’s shaver) and offered money to promote and use the product in their video. This is an example of a sponsored post – and is definitely worth pursuing if you have a strong or niche social media following.
Essentially, companies pay bloggers, social media influencers, YouTube stars to promote their products and services. Not a bad shout if you’re in that position!
The above methods can deliver fantastic returns with the right marketing. When starting out, I would suggest focusing on one strategy and testing it, adjusting it, seeking advice from mentors and scaling up. Once you are earning well, you can learn about other strategies, i.e. e-commerce and creating courses or webinars.
The community that I am part of offers significant training in these strategies and mentoring to students in order to help them create a profitable online business. Many have created have been able to quit their jobs and live the life they envisioned. Click here to learn more!