Welcome back to Broke in Bristol – & beyond the blog that helps you save money, make money and invest in your future. Lots of us are struggling to make ends meet at the moment due to the coronavirus pandemic and for those of us with savings it can feel like our hard work has been for nothing. I asked Bristol-based property investor Agata Gwizdala to share her top three tips on how to still make money from savings now that interest rates are so low.
"Investing can be a lot of fun and indeed very rewarding but the number of options available make it difficult to see the wood from the trees," says Agata. "My suggestion is to do a bit of introspective work and understand why are you investing in the first place. How much money do you want to invest and what are you trying to achieve with it?
"Is your intention to preserve cash for a potential future emergency? Or to grow your capital and withdraw it at some point in the future to buy a house, a car or provide for your children’s education," she asks. "Is this need in the mid term, long term or are you looking to generate a regular income? How about a combination of the above? This list is by no means exhaustive but you get the idea – start with the end in mind.
"If you are not already a sophisticated investor, the options which are most readily available are saving accounts, buying/selling company shares in the stock market (in managed or self managed investment accounts) or property investment. I have tried all of them and will tell you about my experience in the hope that you can benefit from the mistakes I made!
"Let me first tell you about the first two options – saving accounts and stock market investments. Please note it is too early to quantify the impact the pandemic will have on investments like property or the stock market. One thing that seems very likely however, is that savings will get less and less lucrative as the price of money drops. So bearing this in mind, the comparative figures below do not account for the effects the pandemic or inflation have had on these markets so far.
So let’s start with savings. Putting your money in a savings account is not that different from stashing large wads of cash underneath your mattress. The rates of interest that banks are currently offering are so low they are can be considered negligible. I believe inflation will erode your investment over time so you will be loosing money rather than growing it. The two main reasons why I would put cash into a savings account today is to have some emergency money and to be able to move quickly should one of the other two investment opportunities present itself. In the context of investing however, I think keeping cash in a savings account is a poor choice in the long run.
"The one thing I learned about investment in the stock market is that you can get lucky and you can time the market perfectly and pick the right stocks in quantity and exit at the right time. Sooner or later, if you keep making bets as you would in a casino, the house will eventually win. I am a great believer in the practical guide to investment provided by Time Hall in his book Smarter Investment.
"He argues the way to invest in the stock market is to play “the house” and invest passively on the market by tracking an index, say the FTSE 100. In terms of performance over the long term, this will put you above the average investor on that market as the costs are less than if pick individual stocks in the hope that will perform better than the market. This is good news because virtually anyone can invest this way.
"So let’s look at the historic performance of the market in the UK. The compound annual return of the FTSE 100 over the last 25 years has been around 6.4%. This is good, better than saving, but in my view it is not amazing. In real terms if you account for the cost involved, inflation and take away compounding by not re-investing dividends over that period, this percentage would actually be lower.
Since Halifax began tracking property prices in the UK they have increased around 13% annually. This again would reduce if you take costs and inflation into account. The point is that property prices have been on a trend of steady growth for decades and even with recessions and subsequent price drops, property values have proved very resilient and have come back to beat previous records. Let me make this clear – property investment is like any other investment in that there are risks involved and you may not get more back than you put in but the advantages of investing in properties over the other options are as follows:
Properties you buy are physical objects you can touch so they have an inherent value. When companies go bust, their shares can plummet and be almost worthless. A property, at least in the UK retains a certain amount of value even in times of crisis.
A property is an asset you can adapt and change to suit the market and increase its value – you can be creative about it. With shares in the stock market, once you buy, all you can do is check the price on the screen and hope it goes up.
The population around the world is increasing and land available is limited. This drives the demand up and supply is unable to meet that demand. Land prices are what drives the capital growth. This means even if the house gets old and dilapidated, the land it stands on is likely to increase in value along with your asset in the long term.
Having somewhere to live is not something that people can cut during times of recession so even if property prices fall during a recession, rentals tend to stay strong.
Properties can provide a regular income as well as capital growth. The profit you make by renting a property can support, replace or supersede your salary many times over if done correctly.
Most importantly in property investments you can leverage your capital using other people’s money – most commonly mortgages. The return on your investment can multiply by factors of ten by leveraging, specially now that the cost of lending is so low.
Some property investment strategies do not require you to have a large amount of capital to invest in the first place – In fact you can start with very little or no capital. Rent to Rent or Lease Options are examples of advanced strategies which can be used to create the necessary capital to buy property.
"As you can see property offers a level of flexibility and leverage that make it a great asset type for any investor looking for a secure way to generate passive income and grow wealth in the long run. That said everyone is different and property investment may not be the best option. I refer you back to the start of this blog, to really consider what your investment objectives are. For anyone looking to start investing in property it will take some time to learn the basics.
This is something I strongly recommend to anyone looking to jump into property investment. There is
a world of information out there and for someone just starting out it can be difficult to know which sources to trust. But property investment can be straightforward provided you follow some basic rules, pick the right strategy, know your area well and crunch your numbers before making an offer. I found it useful to talk to other investors to find out what kind of investments have worked for them."
If you'd like to find out more about investing in property send Agata an email: firstname.lastname@example.org.