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The Risk of Doing Nothing

When clients are wondering whether they should invest in a property or not one of the questions many tend to ask is: is there any risk attached to it?

The answer is yes. Of course there is a risk attached to it, there is risk attached to everything you do.

The only guarantee you have in life is death.

Is it likely property prices will go down in Central London in the near future? The answer is no, not likely.

What most potential investors completely fail to do is to analyse the risky position they are already in. The illusion seems to be if they do nothing but stay in their current position they are some how risk free.

If you have money sitting in the bank is that counted as risk free? Not if your money’s in a Cyprus bank account it’s not. And what exactly does risk free mean? If you have £100,000 sitting in an account and it grows by a few thousand per annum does this mean that your money is risk free?

What is commonly thought of as risk free is if the principle is the same and doesn’t disappear. In the UK consumer price inflation held steady at 2.8% in March, at its highest level since May last year. The Bank of England said it expected inflation to exceed 3% later this year.

The highest paying account with easy access at the moment is 3%. So if you’re earning this much in your bank account your funds are keeping in line with inflation, correct? Not really as you will be taxed on this as it’s an earning.

The economy has been suffering from the impact of a high inflation rate for the last few years. A high inflation rate is a reality that investors have to cope with in a developed economy such as this.

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It is said inflation is a slow, silent killer, which gradually erodes the value of money, and in turn the value of accumulated savings. Inflation can erode wealth over the years.

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To accumulate wealth, it is necessary for the year-on-year growth in accumulated savings to be higher than the inflation rate. If your accumulated savings are growing at a rate lower than the inflation rate, your savings corpus is actually shrinking as the value of the pound today will be lower than what it was at the beginning of the year. The pound today will fetch lesser goods and services than what it did a year ago due to inflation. Hence, beating inflation is very important for any investor.

In addition many services which used to be free are now having a price attached to them; for example university education and some medical services which used to be free on the NHS . So the cost of living is increasing in ways which cannot be measured by inflation. Some economists argue that printing more money will not address the fundamental problems underpinning struggling economies. On the contrary, it has damaging effects in the long-run in terms of capital accumulation, output, employment, and living standards.

The above scenario paints a risky picture and the situation many face by doing nothing. By default doing nothing and leaving your funds in the bank is doing something, and the chances are your capital is being eroded month on month.

Property investment if done in the right way will act not just as a safety net but has the potential to propel your finances even higher than you expect. An example is a flat we purchased for a client for £214,000 in 2009, which is now worth £360,000 according to a mortgage valuation the client had done recently to raise funds on the property.

The client hasn’t managed to save this much over the years. There is a reason why property is seen as a secure asset, the main reason is that it exists physically – it cannot disappear. Therefore funds put into this investment will not just vanish if there was a ‘crash’. What people term as a property crash is not a property crash, as properties do not crash. The over dramatic statement is used when property prices decline 15-20%; and that too temporarily. Stock and companies can crash and disappear along with your savings.

Very simply, money can be printed and distributed, as demonstrated by the rounds of Quantitative Easing we have had. Land and property cannot as there is a finite amount of it, therefore it stands to reason given enough time it will always rise. One of my favourite sayings is: buying a dud property is like having a bad haircut, if you wait long enough it will grow back.

Of course this is not a reason to purchase a dud property, it should be bought with care and proper due diligence, following the first three rules: location, location and you guessed it location.

There is a reason why in this climate banks are still willing to lend you 75% of a property value. Typically most of the money used in a property transaction is not your own, but the banks; and they will only lend if the property is seen as a good security. They have their own interest at heart first, not yours.

Deciding to invest in property can actually be a lifeline to get you out of your current situation, the sad thing is many don’t even appreciate they are in a predicament.

Doing nothing in the current situation may mean you will end up behind, financially, in the future.

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It is said if you don’t move forward in life you go backwards. This certainly seems to be the current situation.

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Property has been the saving grace for not just investors who wish to have a solid financial situation in the future, but those in business; having a property portfolio can be a solid cushion when times get bad. In business there will be always ups and downs, many of those who have appeared in the Sunday Times rich list have property to thank for their success. If it wasn’t the reason for their success it often was the reason why they could stay in business through bad times.

Investing in property has risk attached to it, but what is the risk attached to doing nothing? This also comes down to human nature. For example many do not see the importance of exercise until the heart attack comes. So if doing nothing is not acceptable in any area of life, why do we accept this when it come to our finances?

Investing wisely in property will neutralise risk attached to it; for example invest in a location where the demand comes form several sources not just one sector, there are many places in the UK where the DSS are the only tenants available. So a change in government policy could mean there is no one to rent your property….

The Real Deal

Edgware Road, London, W2

Purchase Price: £350,000

  • A large two bedroom flat in this popular location
  • Rental income of £20k per annum
  • Valued at £400k
  • Only £50k required as deposit
  • Funding is available

Call us now to reserve!!

Suresh Vagjiani

Sow & Reap

A Property Investment Company

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!Tips of the Week

Investing in bricks and mortar means the investment is real, hence it cannot simply disappear, like non tangible investments such as stocks and shares.

Rather than purchasing in cash it may be tax efficient to take a mortgage, and also it will allow you to purchase multiple properties instead of only one.

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