Savings Vs Investing - What to do?!

Savings Vs Investing?

?Before breaking down the pros and cons to both categories, we first need to understand what is meant by saving and investing. From an article published by Globe Estate & Builders “People — actually 90 percent of people — think it’s almost the same thing when you use the terms?saving and investing.”

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Savings

?This is where we put excess funds from?regular?expenditure into a bank?account, most usually monthly,?and depending on the?type of?account it is?, accrue interest on the funds deposited.?

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Investing

This is where you?can leverage?your?money?to?make?it?grow?by?buying products that?typically?increase in value over time?I.e?Property or Stocks and Shares

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Now that we understand the differences between Savings and Investing, we need to delve deeper into the?pros and cons of each category.?

Savings pros and cons

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Pros?

??Safe and low risk

??Interest rate (depending on account) is guaranteed every month?

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Cons

???Interest is subject to Bank of England and takes a while for banks to pass on this increase

??Currency diminishes in value in line with inflation (ask older family members how much they purchased their houses for or how much certain items used to be)

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Investing pros and cons

Pros

???Returns on investment can be HUGE!!!?

??Many pension funds and banks invest in property to pay your interest

??Property investment can bring multiple revenue streams - for example rental income, capital growth, planning uplift or dividend payouts

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Cons

??Investment is always at?a?risk - this may be due to delays, market conditions, material increases

??Longer term?pay?back

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So, what is better?

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There is no definitive answer to this and depends on multiple factors for the individual and their current financial position.?

There are however?two?points to?consider?when making your decision

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??Will you need the funds readily available in case of an emergency. If so, then?savings is for you

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??If you?have surplus savings and do need immediate access to funds?and understand that all investment comes at risk, then investment is for you

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What we do at Widford Property?

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Here at Widford Property, we develop new build housing schemes and invest into properties that require some TLC but brings?a?good yield and capital growth.?

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New Build Schemes

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Widford Property sources land with or without planning and will run a full appraisal to ascertain the viability of the site. Sites without planning (which is our preferred method), do come at a much higher risk but in turn generate a much higher profit.?

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Example?

Agreed purchase price ï¿¡595,000 subject to planning.?

Four?Houses are approved on the site at a cost of ï¿¡20,000.?

The new value of the land is now ï¿¡800,000 so we have created ï¿¡185,000 worth of equity. At this stage we could decide to sell the site and keep the profit, with a return on investment of 825%.?

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However,?what would happen if we completed the purchase and build out the houses. The new units are valued at ï¿¡700,000 per unit.?

Build costs, land and fees total ï¿¡2,000,000.?

We would receive a?pre tax?profit of ï¿¡800,000

You may be thinking but how to do you?afford ￡2,000,000 to complete?and the answer is simple;?LEVERAGE.?There are a number of high street and more specialist banks that will lend you?money?to?complete the build at a certain interest rate. These bank typically will lend between 70-75% of the total Gross Development Value (in this case ￡2,800,000). However,?they typically require?‘skin in the game’,?which is an input from the investor/developer of around 10%. In this case between ￡200,000 - ￡280,000?which typically?goes to towards the purchase of the land.?

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So, what does this look like to the investor?

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An investor would decide their level of input and agree a profit share. For example, the investor agrees to pay the whole ‘skin in the game’ but would require 50% of the profit. In this scenario,once the properties have been sold, the bank would be paid back first, the investor would receive his initial investment and the profit would be split 50/50. Which would be ￡400,000.?

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Are you starting to see the difference between savings and investing yet?

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Investment Properties?

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Widford Property sources investment opportunities across the UK with our extensive network of agents and relationships to find the best options. After a full dwelling appraisal,?taking into?account?local market, rental prices?andother?investment in the area,?Widford Property will?decide if the opportunity is viable.?.?

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The common method we use is Build, Refurbish, Refinance, Rent or BRRR. As it says on the tin, we purchase a property, renovate it to understand?its full financial position (value), refinance onto a new Buy to let mortgage (BTL) and rent the property out.?

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Example house

Purchase for ï¿¡104,000

Fees total ï¿¡8,000

Refurbishment costs ï¿¡10,000

New value ï¿¡150,000

Total Investment - ï¿¡122,000

New refinance?at?75% Loan?To?Value?- ï¿¡112,500

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In this example,?we are left with around ï¿¡10,000 invested in the deal.?

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The house now rents for ï¿¡800 per calendar month or ï¿¡9600 per annum. The house is on an interest only?by-to-let?mortgage which costs ï¿¡450 per calendar month, so we receive ï¿¡350 per month before insurance, fees?etc..?therefore?this property generates ï¿¡4200 of profit per annum before the above.?

So,?on average it will take between 2-3 years to pay back?the?money invested.. After that,?the property is?generating?an income?of pure profit.?

the?property?is held?for the next 5-10 years and increase the rent in line with inflation (usually 3-4%))) we could receive?between ï¿¡20,000-ï¿¡50,000 in income (not bad for zero investment after 3 years!).?

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The biggest factor we are missing though is?CAPITAL GROWTH.?Over those 5-10 years the property will,?in most cases,?increase in value, let’s say to ￡200,000. We?have?generated an income of between ￡20,000-￡50,000 over the 5-10 years but the property has also increased by ￡50,000.?

At this stage we have further options:

1. Remortgage the property at a better interest rate due to the lower Loan?To?Value, or?pull?out funds to invest in further opportunities.?

2. Sell the property and pay back the mortgage, currently ï¿¡112,500, and release all the capital in the property. For this option we would see ï¿¡20,000-ï¿¡50,000 over the rental cycle?period of?5-10 years and then receive?ï¿¡87,500 pre-tax profit.?

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So,?in summary, the argument over savings vs investment comes down to you as the individual and your financial position. However, if you understand the risks associated and do not require access to the funds immediately?then?investment will always give you the potential to earn more from your money.?

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If you would like to know more and have an informal discussion,?then please get in?touch,?or?refer to our social platforms linked below.?

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Daniel Chapman

Director Widford?Property Ltd

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daniel@widfordproperty.com

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Instagram - @widfordproperty

Linkedin?- @Danielchapman @widfordproperty

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