Is property investing the best way to beat inflation?
We're seeing this being asked a lot on social media these days as the economy continues it's downward turn. Over the years, many have argues that investing in property as an asset class is the best way to make your money go further over the long term, through good economic times & bad, as well as earn an income in the meantime as a result of the rent you receive each month.
In this article, we'll dive into if property investing is in fact the best way to beat inflation, and how effective it may or may not be in the times ahead.
Property prices increased by an average of 7.8%
Whilst the average UK house price fell by 1.4% over the past month, they are still up considerably in terms of the past year. However, many outlets are reporting that property prices could fall up to 20% next year, which would see 'paper' gains over the last 2 and a half years wiped out.
However, other outlets, including Zoopla, are predicting this drop to be the case if mortgage interest rates are listed at 6% throughout 2023. They also predict a more moderate drop of around 5% in house prices if mortgage rates stay closer to 4%. The other major news from the past couple of weeks is that lenders have slashed mortgage rates, with many between 4 & 5% which is still affordable for buyers.
'Time in the market, not timing the market'
Have you ever heard a property investor say this? It means that you shouldn't be looking at the short term when it comes to making money from property, but the amount of time you'll own that property for.
As long as you get your numbers right, and you can create a profitable investment, lenders will allow you to borrow money to buy the property depending on how profitable it will be and the various stress tests they run on their rates & products in regard to the affordability of the mortgage in regards to the monthly rent of the property. But how long will you have that property for? Chances are you'll keep it for 10, 15, 20 or even 25 years, perhaps even longer! That's a lot of time for property prices to increase as the Government continues to fail to hit development targets, and people will always need a place to live. Over the long term, we know how much house prices increase, with many UK cities seeing 40-50% price increases over the past 10 years.
This is a lot of equity built up on the property, thus meaning the money you initially put into the deal is worth more, and of course, you will be getting some income each year from the rent, over decades that does begin to stack up.
Rental prices vs inflation
It is said that rental prices also increase in line with inflation. This is often true as landlords, social housing providers, and commercial lease operators often put their rental prices up so they don't incur extra costs as a result of inflation, and money not going as far as it did the year previously.
Aside from incredible levels of demand for rented accommodation, UK rents have increased by 12.3% over the last 12 months according to Zoopla's latest report. The most recent inflation figures are coming in at around 11.1%, which would put rental increases almost in line with this number.
However, if interest rates increase next year, some Buy-to-let deals may not be profitable as a result of the higher mortgage interest combined with other running costs when it comes to a property or portfolio.
Refinancing & getting creative with investing
One of the other major reasons why investors love property is the potential it gives them with making their money go further. Many investors like to use a proven strategy called Buy, Refurbish, Refurbish, Rent. This involves buying a property at a discounted rate, or below market value, which is typically not in the best condition or has room for improvement. Once work has been done to improve the property, you can then go back to your lender and get it re-appraised, and get a new loan against the new value of the property, pay off the previous loan, and pull the excess value that has been created out of the property. Investors then like to put the money they pulled out of the property down on a second property, and repeat the strategy. This means you could potentially have multiple properties that you are receiving rental income from, as a result of just putting the deposit down once.
With the property market expected to hit a downturn over the next two years, and 44% LESS buyer demand since the mini-budget, investors are getting excited about the potential for the BRRR strategy.
However, with property prices expected to fall and interest rates expected to increase, it may get difficult to perform this strategy and pull money out in one go on many typical Buy-to-Let investments. Instead, investors may have to get creative and turn one property into multiple units, such as HMOs or two self-contained flats in one terraced house. Commercial conversions such as HMOs are proving very popular amongst property investment companies and property sourcers right now, and we expect this trend to continue as we enter this recession.
This is because the property has a higher rental return with multiple units in there, which also makes it a more secure investment as if one tenant stops paying rent, or one unit is void, you have other tenants paying rent, so it can be less of a risk and also provide more value to the overall price of the property as an income generating asset, so you will be more likely to have room to refinance during a downturn.
If you're looking to get started in property, or you are looking for your next investment and are looking for advice on great rental markets, or how the property market will be effected by the upcoming recession, we have specialist local letting agents & partners across the UK who can help.
Simply request a callback below at a time that suits you and we'll be happy to help.
