So, the best rate of interest you’ll get on a deposit account in the UK is about 4 per cent, and for that you have to sacrifice the liquidity that is ostensibly the biggest advantage to holding cash as you have to commit to at least 3 to 5 years for the full rate. Then let’s also take into account the fact that you’ll probably pay 40 per cent tax (if you’re a higher rate tax-payer), and furthermore factor in inflation eating away at your capital and diminishing your purchasing power by at least 3 per cent for each year, and an investment of £10,000 actually loses you sixty pounds (GBP) in real terms:
10,000 + ((10,000 x (0.04 x 0.6))-(10,000 x0.03)) = 9,940
Let’s look at this in terms of risk and reward. In the UK, a cash deposit of up to £85,000 GBP is effectively insured by the government – so one might consider it as risk free. But that risk-free investment will lose you £510 GBP. Let’s then move right to the other end of the risk scale and look at equities, where it has been proven time and time again that the value of shares can fall to virtually nothing overnight, and an investor can lose literally all of his or her invested capital. What kind of reward do we get for taking this huge risk? Well, not a lot. A recent report showed that a portfolio of UK equities generated a compound annual growth rate of just 0.96 per cent for the past 10 years.
Well that’s confusing! Those ‘in the know’ have always told us that a bigger risk equals a bigger return – or something like that, but it would appear that this is imply just not the case. For example, I can buy a property from a distressed seller with a 30 per cent or greater discount to market value, I can then spend a little money cleaning it up, and I can then sell it closer to market value and take the discount as a capital profit. And if I do my research and buy the right property in the right area, I can do this 5 or six time a year using the same seed capital. So in this case my £85,000 earns me a net return (after capital gains tax) of 14.4 per cent every time I buy and sell, which means I earn a whopping 72 per cent per year if I manage to trade five properties over 12 months.
So for this I must be taking huge risk, right? Well, let’s look at that for second. Firstly, property value might fall, but I have bought at least 30 per cent below market value, so property would have to fall by ANOTHER 30 per cent before I lost any money. Secondly, I might have problems selling each property. This is quite true, I might, but if I set my business up properly then I’ll secure buyers before I even acquire the property – and there are ways to do this.
Look, this isn’t a cure all solution to investing, there are risks, but the likelihood of losing money in the long-term is slim, and the opportunity to generate a profit that you will NOT find at any other time than in the unique circumstances of a distressed property market is obvious.