People don’t want to get into debt because they think debt is a bad thing. They don’t want to have the risk of having a mortgage and debt that they must pay. You need to remember that when you get a mortgage, you’re using someone else’s money to buy a property. Your deposits can go further and your tenants who rent the property from you, are going to be more than covering the cost of the mortgage. If that weren’t the case, the bank wouldn’t lend you the money to buy the property in the first place.

Example

If you’re going to buy a property for £200,000 and you’re thinking about buying that cash. Let’s say you use that as an HMO, which is a very good strategy because it brings so much more rental income than a normal single-let property.

Costs Involved

As an HMO, you must pay some expenses. You’ve got to pay your insurance, you’ve got to pay for the utilities, the gas, the electricity. You’ve got to pay for the broadband internet, the TV license, the council tax. And let’s say if we take that off, let’s say it gives you a profit of £1,587 on that HMO, that would be almost £20,000 a year. £19,044 a year profit before tax, that’s not bad based on an investment of £200,000. The rental income is part of the profit you make, but one of the main benefits of investing in property is long-term capital growth. The reality is we live on an island in the UK, there is not enough accommodation. We have an increasing population. Over time, both the rents and property values go up. 

The government predicts we need 300,000 new homes every year. We are building less than 200,000 should we have this shortage of accommodation. According to this in about 10 years, historically property prices will double. That doesn’t happen every 10 years. It doesn’t happen in every area. It’s very much an average over time and around the country, I’ve certainly seen that having invested for almost three decades now, I’ve seen property prices skyrocket, the early ones I bought, and I’ve seen that kind of growth.

Cash vs Mortgage

Buying a property for cash, will give you almost £20,000 a year in profit after paying the expenses. Remember there’s no mortgage. And in 10 years, that £200,000 property might be worth £400,000. Meaning you’ve had a growth of £200,000, that’s a profit of a hundred percent on your initial investment. 

If you were to buy the same property, but instead of using cash, you’re going to use a mortgage. And let’s say you’ve been able to buy this property with a 25% deposit. So that’s £50,000 you put down as a deposit. The bank is going to lend you £150,000. Now, remember, you’re using someone else’s money to buy this property. You’re using the bank’s money. You’ve only put £50,000 in and the property has still gone up by £200,000 in 10 years time. So you’ve made a hundred percent profit on your money, but you’ve only put £50,000 in. So that’s a 200% return on your investment in 10 years time. 

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