When choosing a rock solid investment platform, many investors are still drawn to the buy-to-let market – and for some good reasons.
One of the few things that banks and mortgage companies are still willing to lend money on is the purchase of buy-to-let property.
That means that an investor will only have to put in a relatively small amount of money for an asset that is not only expensive, but which generates income and goes up in value.
If the same investor went to the bank to ask for the same amount of money to buy gold or shares then they would, more than likely, be turned down.
One reason for this is that a property, whether it is a house or flat, is viewed as being a better security than any other investment mainly because it cannot be picked up and taken away by its owner.
However, since home ownership in the UK is so popular, many investors in buy-to-let properties do not consider the various risks that come with investing in the sector.
There is no doubt that they will enjoy a greater return on their investment and most financial advisers will agree that the opportunity for bigger profits comes with those investments which carry the most risk.
Potential investors in buy-to-let properties should be aware that they are taking on something which generally has a higher risk than they would encounter with most other investments.
One unusual aspect for investors in property, is that unlike other investors they stand to lose more.
For instance, if the same investor putting the same amount of cash they got from the bank into shares, then the most they could lose is the value of the shares if the market suddenly collapsed.
The difference with investing in the buy-to-let market is the increased risk brought by borrowing the money – but depending on how the investment is handled then the potential for profit is also greater.
To illustrate this, imagine that an investor puts down a 30% deposit on a £160,000 property which would be £48,000. Now if that property increases in value by 10%, the capital gain on the investment is £16,000 which is 33% of the original £48,000 investment.
If the investor bought the same property without a special buy-to-let mortgage, the capital gain on the original investment would be 10%.
The downside for the investor would be if the property dropped in value below the mortgage amount as they would then be heading into negative equity territory.
In addition, they would also be liable for the fees and interest due on the loan which could be much higher than their original investment.
For this reason, the buy-to-let investor should be using a chunk of their income to mitigate against this happening and in doing so they will reduce their debt exposure and avoid falling property values affecting them.