How to explain in 1 page why someone who buys an investment property can make a 20x return on equity in 30 years, and the average home owner loses money over the same period.
| Mortgage interest | First 2 Years | Next 28 Years | Average |
| 50% Variable | 1.49% | Estimates only | |
| 50% Fixed | 1.89% | 4.25% | 4.09% |
| 80% Variable | 1.09%¹ | Estimates only | |
| 80% Fixed | 2.05% | 5% | 4.80%¹ |
| Capital Appreciation | Year 1999 | Year 2019 | per annum |
| Average UK property | 100,000 | 175,000 | +2.8% per annum² |
| Best UK property sector | 100,000 | 520,000 | +8.6% per annum² |
| Years | 30 | Investment | Home |
| Downpayment | 100,000 | 100,000 | |
| Gearing | 50%¹ | 80%¹ | |
| Property Buy price | 200,000 | 500,000 | |
| Investment Property Value at Sale after 30 years | 8.6% | 2,370,000² | |
| Home Property Value at Sale after 30 years | 2.8% | 1,158,000² | |
| Investment Gross Rental Yield | 5.80% | 543,000³ | |
| Tax & Maintenance Costs over period | 1.30% | -78,000⁴ | |
| Home Costs over period | 1.70% | -255,000⁴ | |
| Investment Mortgage Interest | 4.10% | – 197,000¹ | |
| Home Mortgage Interest | 4.80% | – 576,000¹ | |
| Investment Principle Repayment | – 100,000 | ||
| Home Principle Repayment | – 400,000 | ||
| Rent | 3.45% | – 518,000³ | |
| Average family moves 1.7x | 0.7% | -97,000⁵ | |
| Net gain | 2,020,000 | – 170,000 |
- The investment property can take a conservative fixed interest mortgage at lower gearing ratios, either through the purchase of a smaller property (student bedsits) or by forming or joining an investment company. Home owners are always tempted to maximize gearing and take the flexible rate opening them up to higher rates and possible insolvency. This tendency to maximize the gearing ratio, adds an extra 0.7% in interest payments per annum.
- Capital appreciation across the UK is not flat. Over the past 20 years the best performing property assets like student housing in Brighton and Manchester have averaged 8.6% per year whereas the average house across the UK has done 2.8%. This means that if you select your property investment based on where you live and work you are likely to have a capital appreciation closer to this average.
- Rent is not wasted money. The average gross rental across Southern England is 3.45%, yet you can find investment properties with 5.8% or even more. Therefore you can cover your home rent with the rental yield of an investment property.
- The average home owner spends 0.7% of the value of their property on home maintenance and decoration each year, whereas investment properties average 0.3%. This has a significant impact on returns over the life of the property.
- Home sizes may also have different and changing requirements compared to an investment. You start with a bachelor pad, change to a house with 3 bedrooms and end with a retirement cottage. The average number of house changes in 30 years is 1.7. You are also buying and selling at times not based on the market cycle but rather on your life cycle. If you keep flipping these houses you have additional transaction costs in stamp duty, legal fees, renovations, and mortgage penalties.
All of these factors combined mean that the average homeowner makes a loss on their home property when all costs are carefully accounted for, whereas an astute property investor makes 20x their money over 30 years. The home owners always trumpet the net purchase price and gross sales price (in this model GBP500,000 and GBP1,158,000) suggesting they have made money. But when all costs are accounted for they have lost GBP170,000 over the period.
wildfry 