Property Investment vs. Pensions and Savings

The property investment market has been looking a bit bleak over the last few years however 2011 saw the buy to let market come back into fashion somewhat. Rising property prices and the need for increasingly large deposits has resulted in many wannabe homebuyers being unable to afford to join the property ladder, and consequently they have turned to the private rental market for somewhere to live.

At the present time (January 2012) the demand for private rental property far outweighs the supply and this trend is set to continue for many months to come. The result is that buy to let property investment is again a secure place for your savings, and one that virtually guarantees a better return than any pension or savings account.

An example

Let’s say, as a potential property investor, you have £20,000 saved up to use as a deposit. You scour the property auctions and find a property investment opportunity that suits your needs. The property in question has a market value of £100,000 but the guide price is £70-75,000. After some frantic bidding you get the property for £72,000. Before doing anything to the property you have generated instant equity equal to £28,000, and this could increase further after refurbishing your new property investment.

So, you now use your £20,000 as a deposit on the property and take out a 75% LTV buy to let mortgage for the remaining amount. This will give you a few thousand pounds free to modernise the property, if indeed it requires modernisation.

Using average buy to let mortgage terms of 25 years and a discounted interest rate of 5%, your monthly mortgage payment on your property investment will be somewhere around £310. Add to this your landlord insurance payment and your total monthly outgoings on the property will be around £350.

The fact that your property investment has a market value of £100,000 though means that you can potentially rent it for up to £650, depending on location and local demand. Using £600 as a minimum income you would stand to make a profit of £250 every month (providing there were no repairs or other problems with the property).

 A quick comparison

 If we now compare the potential profit you could make from your property investment with the potential profit you’d make from leaving your £20,000 in a saving account or a pension you’ll quickly see which will leave you better off financially.

By investing in the example property mentioned above you could make £28,000 in equity and a minimum of £250 each month, or £3000 per year. This profit is in the form of an on-going cash profit and can be saved in a high interest savings account until you have enough to invest in a second property…or it can be spent knowing you still have nearly £30,000 of equity to fall back in the case of a financial emergency.

Leaving the £20,000 in a savings account might provide you with a couple of hundred pounds profit per year, but nothing like the profit that your property investment would generate. Similarly a pension fund could provide a healthy return but depending on your age you may not see this for 30 or 40 years!

Providing you take the time to find a property investment with potential there is no way you can generate less profit than you would get from a saving account or pension, and you get to spend it on an on-going basis safe in the knowledge you still have equity.