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Property investing? The F@%K is that? In the US it’s more commonly known as ‘real estate’, but in the UK people like to get fancy and call it ‘property investing’. It’s basically the same thing, just each one follows each country’s rules.
Here’s what we’re going to be covering today:
1- What is property investing/real estate exactly?
2- How do people make money from it?
3- The benefits of property investing
4- How to get started in college
What is property investing exactly?
Property investing is basically putting your money into properties: houses, flats, estates, etc in hopes of getting a return in the future.
There are two ways of doing this:
Buying a property: You can buy a house to let it out, or buy a house to sell it at a higher price. But you’re still buying a house.
Buying a share of a property (REITs): A company manages several properties. You buy this company’s shares and receive monthly dividends. Someone else does all the dirty work, you just invest the money and reap the returns (not as high, of course).
Related: What the F@%K is Investing?
Unless you have a few hundred thousand lying around, you normally buy properties through a mortgage: a loan from the bank to help you buy your house. You deposit a certain amount of the loan and you pay the rest over several years with interest. There are different mortgages for different purposes: Buy-to-let, leasehold, etc. A lil’ example:
Say you want to buy a house for £100,000. You talk to your bank and get a mortgage: you must put down £5,000 and you’ll pay the mortgage over the next 20 years at an interest rate of 3%. A cool trick? Get your tenants to pay for the mortgage and expenses. More on this later.
Appreciation: The value of a property changes with time, depending on the market and on the demand and supply. When you decide to sell a property, an external surveyor comes along and does a judgement depending on certain calculations, and hopefully the value has gone up since you bought it. What makes houses appreciate in value? People moving homes: an area with a lot house-moving means appreciation, since you’ll always someone looking for a house. New jobs. A new school/university. Something popular opens up. Just think about what attracts humans: that’s where they’ll live.
Risk: Property investing is known to be one of the more stable investments. This is because no matter what happens to the market and the outside world, people will always pay for a roof over their heads. The risk comes when you decide to make your money by selling the house at a higher price: you might not be guaranteed a profit. You also need to make sure your property will prosper and produce a return: do your research and calculations carefully.
How do people make money?
As explained earlier, you can make money through actual properties, or by buying REIT shares. Although shares may sound easy and simple, the real money is made when you do the dirty work yourself (and it can be fun). So in this section I’ll be explaining how people make money when they buy the house themselves.
So you’ve bought a house/flat. How do you make the ££? Once again there are two ways:
1- You improve the house a bit, wait some time and sell it at a higher price thanks to appreciation (risky).
2- You let it out to tenants or Airbnb style short lets.
1- This is called flipping, and is true dirty work (unless you hire someone else to do it for you). You personally have to do your research and have an eye for improvements. You invest additional money into improving the house, wait a bit and then sell it at a higher price. The profit you make is called capital gains, and with that money you can go off and find another house to improve and resell.
2- This is called cashflow/passive income: The trick is not actually buying the house outright, but using someone else’s money to buy the house: the banks’ (yes they can be useful sometimes). With a mortgage, you’re effectively spreading the cost of the house over many years. The £100,000 disappear in 20 years instead of 1 day. The catch: But if the cost is spread over 20 years, so is the profit.
If you had a stack of £100,000 and bought a house, you wouldn’t start making a profit until the tenants rent had covered it all; and that takes years! With cashflow investing, you’ll be getting the profit immediately once the rent covers the mortgage and expenses. Just think about it for a second… there’s the beauty in property investing. You put in some money, you automate the rest and bam: passive income.
Of course, it’s not as easy as I’m making it seem. Property investing is a true skill that you gain over time with experience: you need to have an eye for properties which will be appealing to tenants, you need to know how to get the appropriate mortgage, you need to do the correct calculations to make sure you’ll be making a profit, and most important of all you need to know your way round all the tax lingo.
Because in the UK, property investing isn’t as generous as it is in the US; there’s a bit more tax and costs involved:
Related: What the F@%K is Tax?
In April 2016 the LLBT was introduced: an extra 3% of tax on every other property your purchase (yes it’s painful). There are also tax charges on the capital gains you make when selling a property (capital gains tax) and you have to pay income tax on the rent you receive from your tenants. Bam: That’s three types of tax right there.
However, there are a few deductibles and if you know you’re way round the system you can find some ways to reduce the tax impact. It’s a bit more advanced and requires more research, but a This is Money article covers it pretty well.
Overall real estate investing is attractive because it’s some form of passive income (unless you’re flipping houses day and night). It’s a more stable investment because it’s a tangible asset, you can touch it. And as I said before, the overall demand for housing won’t ever decrease: last time I checked there are more and more babies being born.
‘But what happened in 2007? Didn’t the housing market crash?’ people shout out. Yes it did, and put simply, it crashed because banks were giving out too many mortgages with low interest and low deposits. Too many people were taking out mortgages they couldn’t afford, they were getting into huge debt and couldn’t pay back the banks. This created a bubble and pop, the rest is history.
Could this happen again? Yes it could. However! The only investors who were affected were the ones who were relying on appreciation to make a profit. Suddenly, they couldn’t sell their houses at a higher price (pretty nasty). But! Those who were renting out their houses (cashflow investing), weren’t so much affected. Their tenants continued to pay the rent and they continued to pay the mortgage. That’s why relying on capital gains is more risky.
I’ve pretty much listed all the benefits of property investing already, but I’ll break them down again here:
The cashflow: It really is passive income. The profit you make after expenses is pure profit and it comes in every month. This is what attracts the most investors. And who doesn’t want passive income? You get to spend your time doing something else: building a business, traveling, eating hot dogs. As long as your tenants are happy and the property doesn’t break down, you’ll get your monthly income.
Selling high: Although more risky, you can also get lucky. Maybe you seek out the right opportunity and find a place which you feel will go up in value quickly (university areas are a great example). You buy your flat at £100,000 and keep it for 5 years. In 5 years the area goes up high and you get to sell it for £500,000. That’s a profit of £400,000 (excluding taxes and costs), just from waiting around. Gotta admit, that’s pretty sweet. But just remember that it could go the other way round too…
Tax benefits: Although I did say the UK was less rewarding than the US, there are still some tax benefits when it comes to real estate. If you live in the house you’re renting out, you can claim Rent a Room relief and not pay tax on the first £7,500 of your income. You can’t do this if you’re renting out the entire flat/house. However! You can claim certain expenses against the income you make, meaning you pay much less tax.
The expenses: If calculated and planned correctly, the rent of your tenant will cover all expenses, and leave a little room for your profit. The rent will cover the mortgage, the bills and the tax. This means you don’t have to worry every month ‘where will I get the money?’, because the answer is right in front of your face: the tenant’s paying. Once again, pretty sweet.
Control: What’s great about property investing is the enormous control you have over your income. Instead of passing your money off to some nervous guy on Wall Street or your dodgy banker, you get to choose exactly where to put your money. I’m not saying property investing is better than stock market investing, just that there is an advantage to being able to really see what your money is doing.
Live for free: Yes you have to manage all the expenses and the tenants, but if you’ve bought the house and are renting out a room that covers all expenses, you’re essentially living there for free! No more worries about satisfying a landlord or paying a higher rent each month, you’re thy boss.
How to get started in college
So you’ve read all those sweet spots about property investing and you’re interest is now piqued. As a university student, it’s not always easy to get involved: you need the cash and you need to know what to do. Well, we may not be able to figure out the cash part yet, but we can definitely work on the ‘know what to do’ part: by learning.
I got interested in real estate in college because my mum bought a property and went through the whole process with me. It was hard work and more complicated than I expected, but it got done and I learnt A LOT. It was a really great experience, but I know that not everyone’s parents are out there buying houses.
So, how can a normal, hot-dog eating, college student get started? Let’s get down to the nitty gritty.
Education: You might not be able to put it all into practice, but you can definitely do some learning. This can be through books, blogs, websites, podcasts, talking to real investors. BiggerPockets is US based but still a fantastic resource, and a website such as Property Investments UK or a book like Property Investment for Beginners by Rob Dix are great resources. In Scotland we have the ESPC, and they host very informative and interesting talks on investing in the UK. Check out the Resources at the bottom of this page for more info. And never hesitate to ask questions: maybe you know someone who’s into property investing. Ask them if they could be your mentor and teach you how it works.
Credit rating: A big part of the buying a house project is getting a suitable mortgage. And what helps you get a mortgage? GOOD CREDIT. This means you need to work on improving your credit rating: pay your bills on time, get on the electoral roll and and don’t mess up. This will improve your chances of getting a good mortgage in the future.
Related: Student guide to credit cards
Prepare the ££: If you’ve done the Financially Mint 6 day email course (it’s soon coming out) you’ll have that 15% set aside for personal savings. How about allocating some of that to building a deposit for your first house? It may seem ambitious to others, but if you believe this is a path you’re interested in following, why not?
Practice: It’s the best way to learn, but it’s true that the opportunities aren’t always there. Here you’ll really have to hustle. You can either try to get your parents on board and get them to co-sign a mortgage (having gone through all the previous steps), or you can try to assist other people in buying houses. Maybe you can intern in a lettings agency or assist other surveyors.
Yes, this is really for the students who want to go hardcore property investing, so maybe not for everyone. All I’m saying is that there are ways round the ‘I’m a student so I can’t buy a house’. It really comes down to two things: hustle and research.
Finito! I sincerely hope you now understand a bit better what property investing is all about and why it’s so attractive. And the great thing: you can do this when you’re 70, meaning this is a great way to ensure a comfy retirement. Property investing really isn’t only for the rich or the super-smart; anyone can do it! It simply takes practice and willingness to learn from mistakes (keep a record of ALL YOUR EXPENSES!).
Here are a few resources to light the investing fire:
- Bigger Pockets
- Property Investments UK
- Property Investment for Beginners by Rob Dix
- Property Calculator
- Property Investor’s Network
- Landlord Zone