ABCs of buy-to-let property investing

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The question about whether a home is an asset is often illogically extended into a debate about whether property is in fact a “good investment”. Comparing a primary residence, holiday home, or similar lifestyle property, to a buy-to-let investment property acquired to increase wealth, is comparing apples and pears. So is comparing a buy-to-let property investment to a passive investment on the stock market or in a retirement fund.

A buy-to-let property is not similar to a primary or lifestyle residence, it is much more like a business venture undertaken to create, firstly, an ongoing, inflation-linked income and, secondly, capital growth.”

The model is very similar to that employed by listed property companies, he explains. “Like residential buy-to-let property investors, albeit on a larger scale, listed companies acquire a property, such as a shopping centre, often using gearing (finance).

“The shops are then rented out to tenants, to create an ongoing monthly income to cover expenses, including the finance repayments, maintenance, and the fees for professional tenant and property management.

“In addition to the monthly income generated, the property also produces capital growth over the long term.”

For those investors who do not have the time, expertise or inclination to implement this tried-and-tested system of creating wealth themselves, these listed companies offer a passive form of investment: buying shares in the company, in exchange for a portion of the monthly profit and with the option to sell the shares.

Essentially, for the ability to invest “passively” and to sell shares quickly, these investors sacrifice not only higher returns, but also any control over the investments made by the listed company and any protection against the volatility of the stock markets.

“As such, a buy-to-let property is also not similar to this kind of passive investment, it is much more like a part-time business, through which investors implement the buy-to-let model – used by the listed companies – by and for themselves in the residential sector: acquiring a property, often using bank finance, and renting the property to a tenant, with a professional agency managing the tenant and the property.

“They do this because such a direct investment in a buy-to-let property means that both the ongoing, passive, inflation-linked income and the capital growth accrues to the investor, producing a much higher return, while the investor also retains full control over the investment, without any exposure to the volatility of the stock markets.”

As such, one cannot compare a buy-to-let property investment to a lifestyle property, nor can one compare a buy-to-let property investment to a passive investment in, for example, stocks and shares. Furthermore, one can also not judge whether “property” is a good investment if the focus is solely on capital growth.

“Focusing solely on the potential capital growth of property obscures the real reasons why a direct investment in a buy-to-let property is such a powerful vehicle for building wealth: the dual returns of an immediate and ongoing, inflation-linked income and compounding capital growth over the long term; the ability to gear the investment (to borrow money to acquire the property asset); and risk protection against market volatility and low returns.”

“These features ensure that a buy-to-let property significantly outperforms the returns possible through owning a lifestyle property, speculating with property (buying with the hope to sell at a higher price in the near future) or a passive investment in the stock market. It is no surprise, then, that property remains the asset of choice of the world’s wealthiest.”

Many investors are surprised to discover just how simple buy-to-let property investment is: acquire a well-chosen property, rent the property out to a reliable tenant, get a professional rental management company to manage the tenant and the property for a fee, and then watch your investment grow into a passive income stream for life as the property produces an inflation-linked rental income month after month, while also producing capital growth year after year.

“Doing so does not require qualifications or experience, or much time, training or effort, a lump sum investment or even substantial monthly contributions. All that is required is a new, clear and rational perspective about the power of buy-to-let property investment to create consistent and impressive returns.”

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