When you are an investor there are a lot of things you can put your money into. Stocks and shares, funds, art, bitcoin, crowdfunding, there is a pretty long list. Property is always high on that list. High net worth individuals will be told by financial advisors that they should invest a certain amount of their wealth into real estate, but why?
Read my “Why Genuine Investors Never Buy Cash” for a detailed breakdown on improving your investment returns and capital appreciation.
If you are looking at a property to live in yourself read my “How Buying Property Halves Your Rent” and “How Long Do You Have to Stay For Buying to Make Sense”.
It isn’t the reason you think. Most people think that real estate investing is about buying at the bottom of the market and you make money through capital appreciation i.e your property going up in value and you selling it at a profit. The reality is that most people buy near the top of the market when it is hottest and so don’t get full advantage of any appreciation and sell during the value slide.
Read my “How Never to Lose Money on a Property Purchase”.
Being an amateur and betting on which way the property market is going to jump is a risky game and most of the time the professionals don’t get it right. The professionals however make sure they get their “fundamentals” right. Fundamentals is a clever sounding terms for doing your maths.
Even people whose property doesn’t appreciate still made a great investment, and her
e is why:
Let’s use the example of a property with a net return of 6% (net meaning after service charges). This return is reasonably common in the market across a lot of property types. An investor will need a 25% deposit and a savvy investor will finance the rest at around 4% (FAB is currently offering 3.99%).
The mortgage repayments will take up about 80% of the rent, leaving you 20% to put in your pocket. In addition, about 30% of those mortgage repayments (30% of the 80%) will go to repaying the principal of the loan, which means you get that back when you sell the property. This means that at the end of the investment you have just under half the net rent in your pocket.
I’m If you use a nice easy example of a one bed apartment for sale at AED 1m, renting
for around AED60,000 per year net (after service charges) using a 25% deposit (AED250,000), with the remaining 75% (AED750,000) financed at 4% over 25 years. You have used AED250,000 cash to buy this property so in earning AED30,000 your return is a huge 12%. Yes, 12% on the cash you have put down (30,000 over 250,000) – what other saving scheme can compare to this? Don’t believe me? Do the sums yourself. You can see an amortization schedule here.
If one of your friends called you up and told you they had a scheme to make you 12% per year you’d think you were getting scammed.
If you’d like to do more research on this yourself look up the principals of “Leveraged returns” and “Cash on cash returns”.
Crompton Partners is the largest Property Agency in Abu Dhabi and we would be happy to talk to you about anything regarding sales or leasing in the Nation’s Great Capital. Please feel free to call me on 050 6145199 or email at ben.crompton@cpestateagents.com.
