Why long-term low-risk property investment pays dividends

The Internet has opened up the worldwide property market with investors now able to switch their funds to properties all around the world. This has created an array of exciting opportunities and it can be easy to get carried away on this wave of optimism. However, sometimes it is best to take a step back and look at low-risk long-term property investments because they can pay serious dividends.

Long-term rental income

As more and more property investors chase the latest capital gain many miss the opportunity to lock in what can be double-digit rental yields. There are many areas of the UK which offer significant rental income but relatively low potential for capital appreciation. As general rents continue to rise but property prices perhaps lag behind in these areas so the relative rental yield continues to move higher. Is this starting to appeal to you yet?

If you are able to put down a significant deposit on a rental property and leveraging your investment by a mortgage then the rental income should easily cover your mortgage payments. Whether it takes 10 years, 20 years or 30 years, you will eventually end up with a property which is fully paid up and 100% equity. Even if the property in question offers relatively low potential for capital appreciation it will still appreciate over 10, 20 and 30 years in this example.

Low-risk rental income

If you choose the correct area and are able to source the right property at the right price there is every chance you can lock in long-term low-risk rental income. While double-digit yields are a godsend for property investors, even a significantly lower but secure rental yield can be attractive over the longer term. You need to balance the risk reward ratio because if there was a relatively low risk of being without a tenant then you will gradually see your equity within the property grow, as you pay off the mortgage, as well as some form of capital appreciation. It may take longer to pay off this type of low-risk low rental yield property but again this will offer a backbone for your portfolio going forward.

In simple terms the lower the rental yield, the greater the potential for capital appreciation although this will vary from property to property.

No need to chase capital appreciation

Many investors new to the property investment market make the simple mistake of assuming that capital appreciation is everything. This is not the case, it is the risk/reward ratio which you should bear in mind whenever you invest your funds and whenever you decide to sell. Those who continually chase capital appreciation, giving very little thought about rental income yields, will “catch a cold” at some point. It’s only a matter of time before this obsession with potentially high-risk capital appreciation investments goes wrong. It is all good and well taking relatively small profits on multiple property transactions but it only takes one “problem investment” to potentially wipeout previous profits.

The best way to start an investment portfolio is to have a backbone of strong cash flow via rental income and then use this to leverage future investments. It makes sense to have a mixture of strong rental yield investments as well as those with more potential for capital appreciation. These two different types of investment are at either end of the spectrum and offer a level of balance going forward in volatile markets.

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