With interest rates on bonds and savings accounts at very low levels, many of us would like to invest in property to improve the returns on our portfolios. But with price-tags that sometimes reach the millions, property might seem like a faraway, once in a lifetime, investment. In fact, as we’ll see below, it is possible to invest in property with as little as $50,000.
But first, let’s take a step back and go over the basics of property investment.
Why should I invest in property in the first place?
It’s a good hedge against inflation.
Inflation is the average increase in prices of goods and services in a country. Remember the price of an ice-cream when you were a child and how much higher it is now? That’s inflation at work. The problem is that it eats away at your real financial returns. If you earn 2% interest on your savings account but inflation is 3%, you are actually paying the bank 1% per year to hold your money! The good news is that because property is a real asset, over time its price tends to go up with inflation. Why? Well, if the price of the ice-cream doubles, the rent of the ice-cream shop can double, and so the price of the property itself doubles too. Of course, in any given year this might not hold, but over long stretches of time it does.
The returns are good
The return on investment, or yield, is how much you can expect to make on an investment, as a percentage of what you invested. So if you add up the rent on a property and any increase in value and subtract the costs and taxes of running it and divide that by what you invested, that’s your yield. You can compare that number to the yield you make on your other savings, as long as you bear in mind that in addition to the rent, the value of the property is likely to follow inflation upwards, whereas with financial investments, the principal does not increase with inflation.
Right now, in most rich economies, yields on property are higher than the yields on financial investments. There is no universal rule determining that it must be so, and in some countries it’s the other way around. But in places like the UK, Spain and Germany, property offers higher yields than bonds or savings accounts.
In fact, it is not only advantageous to invest in property, but it becomes possible to take out a mortgage at a certain rate and invest the funds at a higher rate in property. That reduces the upfront investment and so increases the return on investment even further.
The all-important mortgage
In order to invest in property with $50,000 you will need to take out a mortgage for the rest of the property price. So getting the right mortgage is essential to making a good return. Bear in mind that lenders and governments often treat borrowers who are looking to buy-to-let less favourably than home-buyers (and especially first-time home-buyers): income taxes and stamp duties, mortgage rates and minimum deposits will sometimes be higher.
The three variables to consider when taking out a mortgage are: the minimum deposit, the mortgage rate (and whether it is fixed or a tracker), and the payment schedule.
The minimum deposit is how much you will have to invest up-front. It ranges from 5% for your own home to as much as 40% for a buy-to-let property.
Mortgage rates will vary according to your credit score, and basically you are looking for a rate that is as low as possible and at the very least lower than the expected yield of your property. Also make sure you understand whether you are getting a fixed rate or a tracker rate, which means your rate will vary according to interest rates set by the government. Bear in mind that governments are likely to increase their interest rates over the coming years, so
tracker rates are likely to rise.
Ideally, you want to make sure that the income from your property covers the mortgage payments easily, and lenders will require that too. They might require that rents are 25% above mortgage payments, for instance. One option may be to take out an interest-only mortgage, which means that you only pay for the mortgage interest and do not pay down the value that you have borrowed. While this might seem counterintuitive, it means that you can re-invest a higher portion of your property income in your high-yielding portfolio, while also minimizing your tax bill if mortgage interest is tax-deductible (as it is in the UK, for instance).
OK, so how do I invest in property with $50,000?
Forget London and New York
Remember that this is an investment, not a holiday home or a vanity purchase. It’s tempting, especially for overseas workers, to think only of a handful of global capitals. But that mind-set is partly responsible for driving property prices in these cities to unaffordable heights and also dragging down yields. Remember, you should be looking for the most attractive investment. In the UK, major towns other than London (such as Birmingham and Manchester) and commuter towns in the Southeast are attractive alternatives. In these towns, it is easier to find good quality property in the £150,000- 200,000 range, which, with a mortgage, can be bought with £50,000 deposits. In Continental Europe, Berlin, Madrid and Barcelona are attractive markets.
When developers start building projects, it’s interesting for them to sell some of the property before it is finished, because that way they transfer some of the risk of a market slowdown during construction to the buyer, and because the incoming cash can be used to pay for construction. In exchange for this extra market risk and earlier payments, they offer buyers discounts vs. market rates, meaning your $50,000 will go much further.
Consider a monthly payment plan
If even $50,000 in one go can be a challenge to round up, consider a monthly payment plan. For example, Plan Your Finances offers a monthly plan in which you invest a fixed amount per month, starting at £1,500, in off-plan property while it is being developed. By the time the property is developed, this will have allowed you to build equity of around 30% of the property value, which will then allow you to secure a buy-to-let mortgage. In addition to this, they offer management and rental guarantees which protect you if it takes a little time and effort to find a tenant.
In summary, property investment is currently an attractive alternative to low interest rates, and by focusing on the right markets and investment structures, it is possible to get started with as little as $50,000!