Investment property

Buying to let is an investment.

It is best viewed as a long term investment. This is because house prices can go down as well as up and if you had to sell in the short term you might lose money.

There is no fixed term to this sort of investment. You can sell the property at any time. Alternatively you could clear the mortgage and retain the property as a source of income.

Buying property to let can be used as an alternative pension income.

If you buy or own a property outright then the net rental income would be the return on your investment.

net profit or =        rental income less operating expenses x 100%                                net rate of return                    purchase price

Nationally the figure for rate of return is about 7%. This compares favourably with interest bearing accounts however there is a low risk to your capital with interest bearing accounts. The rates of return in your selected area may differ and you should make your own calculation.

Few people will have the resources to buy outright. Most people will opt to borrow the majority of the purchase price. This brings into play the term 'capital gearing'.

If we now enter your mortgage interest payments as an operating expense into the above formula. The net rate of return reduces considerably. The above formula does not take into account the capital value of your property over time.

If you buy a property for £100,000 with a £20,000 deposit, and the capital value increases to £110,000 after 2 years, you could sell up and redeem your mortgage of £80,000 leaving you with £30,000. Your initial investment of £20,000 has increased to £30,000; an increase of 50% over 2 years or 25% p.a. (ignoring the costs of buying and selling).

The above example demonstrates how your investment of £20,000 benefits from price rises in the full value of the property.

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