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Property

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Property creates wealth in the following 4 main ways. 

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1. Capital Growth

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Historically house prices in the UK have risen and will continue to rise over the long run. Since 1968, the compounded average annual growth rate (CAGR) has been 8.4%. There have only been 6 years during this time where house prices dropped when compared to the previous year. It is easy to see from this alone why owning property is an appealing proposition. 

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Average House Price UK 1968-2020 v2.png

Source: Land Registry

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2. The Power of Leverage 

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If you buy a property through a mortgage you are utilising the power of leverage. This is because leverage has allowed you to purchase a home through borrowing money. Although you only technically own a proportion of the house, all of the benefits and risks are transferred to yourself. 

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If you want to buy a house with a 25% deposit that is worth 

Example

House price: £100,000

Deposit: £25,000

Mortgage: £75,000 

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The value of your mortgage is not affected by an increase in the value of your house and will only go down as you continue to make repayments. 

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If the price of the house increased in 5 years to £125,000 you would have capital growth of

£25,000 (125,000 - 100,000) that purely belongs to yourself.

 

Therefore, your return on investment would be 100% (25,000 / 25,000) because you only put down £25,000 of your own money and there has been capital growth of £25,000.

 

Alternatively, if you bought the house using £100,000 of your own cash then the return on your investment would be 25% (25,000 / 100,000)

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Most people cannot afford to purchase a home outright 

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3. Adding Value to a Property 

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Home renovations is a great way to add value to a property. For example, updating the kitchen for £10,000 could lead to a £15,000 rise in the value of your home (£5,000 profit).

 

When you come to sell your main home that you live in, you are unlikely to have to pay capital gains tax. Thus, any uplift in the price of the property as a result of an improvement will be a tax free uplift. Click here to learn if you would be eligible for Private Residence Relief. 

 

You must always be cautious of the area you live in as to the extent of work you undertake on a property. This is because most houses will have a price ceiling, above which no matter how much more you spend on improving a property it will not rise a certain level.  

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4. Rental income 

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Renting out a property if an additional way of generating money from a property. Historically, rents tend to rise with inflation and have at times even outstripped inflation. 

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