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How to optimise your returns from an investment

Dec 4, 2018

The object of investing is to nurture an existing sum of money; most of the time the ultimate goal is long-term capital growth.

But some of us simply aren’t rich enough to hand over a large chunk of cash to a stranger and forget about it for 10 years. And because we aren’t rich, we want some kind of interim return to help us plan our yearly budgets. We might be new to investing, and want the best possible return for the least possible risk.

In this article we’ll see how we can get your capital to do a bit of multi-tasking:

Demand a fixed annual income

A fixed annual income is a contracted payment representing a percentage of interest on your initial capital outlay; it should never come out of the capital itself.

Most experts acknowledge that fixed income investments are ideal for the more risk-averse of us; we like to know exactly how much is coming in and when. However, they tend to draw the conclusion that the relatively low risk involved usually equates to low returns.

This needn’t necessarily be the case.

Look beyond the usual suspects

Most seasoned investors and financial professionals will tell you that a NET annual yield of 7%+ is worth biting someone’s hand off for.

Treasury bonds and preferred stocks can often deliver a fixed annual income, but check the rates first and factor in any management fees or administration charges you may be liable for.

There may also be restrictions on your exit options if you need to liquidate in a hurry, locking your capital in or losing you money.

Instead, you might explore some of the options in the UK’s commercial and residential property sectors. Some investments offer a fixed annual income of 7-12% NET, contracted for as long as 10 years.

See if you can use someone else’s money

You can’t take out a loan to buy stocks, shares or bonds.

Some property, on the other hand, can be mortgaged – you could have full legal ownership of a £200,000 property for a capital outlay of just £50,000, depending on the terms you’re offered.

This is known as ‘gearing’ or ‘leveraging’and would effectively free up £150,000 for you to invest elsewhere – or spend on anything else you please.

Be aware of the costs in time and money

If you choose to manage your own investment portfolio, you need to be very confident that you have the requisite knowledge and experience – and the time to devote to it.

If your portfolio is handled by a fund manager, you should be in safe hands – but make sure you know to the penny how much those hands will cost to hire and what extra charges may be due in certain unforeseen circumstances.

If you’re considering a traditional buy-to-let property investment, do allow at least one month each year for void periods when your property earns you nothing. You will also need a constantly available emergency fund for unexpected repairs and replacement.

Or if you decide to have the property managed for you, do the maths first to see what effect it will have on your NET rental income.

Purpose built investment properties nowadays tend to come with all-inclusive management 365 days of the year, often onsite 24/7.

The service takes care of all marketing, letting, repairs, maintenance, replacements and rent collection.

This will give you a totally passive income with no further costs whatsoever.

Can you save some tax?

Because of the way UK property is classified, assets such as serviced apartments and purpose built student accommodation are regarded as commercial property.

As a result, they are not liable for Stamp Duty Land Tax at purchase up to a value of £150,000. A similar residential property would incur a charge of £4,500, with a further surcharge if it’s your second property.

There is also a classification of rental property known as Furnished Holiday Lettings (FHLs); the tax authorities look at these as an entirely different business proposition from buy-to-let and other commercial property options – adjusting the rules accordingly.

Furnished Holiday Let tax savings: a comparison*:

*Based on a 40% taxpayer

Asset classFurnished Holiday LetOther commercialBuy-to-let
Purchase price £160,000£160,000£160,000
Yield (%) 7.3%8.5%5%
Annual income£11,680£13,600£8,000
Capital allowances£43,200£0£0
Income after tax£11,680£8,160£4,800
Years of tax-free income3.700
Income after tax in 3.7 years£43,216£30,192£17,760
Income after tax in 10 years£87,366£81,600£48,000

These provide owners with capital allowances along with other benefits which can result in years of tax-free income.

Maximise your capital growth prospects at resale

It’s important that any benefits which apply to your property are fully transferable to a new buyer.

Not only will a proven track record of regular income delivery prove attractive, but an assured fixed income term is another tempting carrot to dangle.

It will also allow you to use a technique called yield compression to offer buyers an excellent deal while achieving as much as 40% capital growth for yourself.

Similarly, many new buyers will be drawn to the tax benefits of FHLs.

Look for pole position

And of course, there’s no substitute for a prime site.

Whether it’s a student block with the university campus on its doorstep, a beachside serviced apartment in a popular vacation hotspot, a holiday lodge in a destination resort or a buy-to-let apartment in a vibrant area of a commuter town, you can’t beat a quality property in a great location with a long-term demand/supply imbalance.

If you buy in the right place, there’s no reason you shouldn’t make at least a 70% profit on your capital from rental income over 10 years.

And bearing in mind the old adage that UK property prices roughly double every decade, that represents a very healthy return on your investment – with no effort at all on your part.

Other articles you may find useful 

  1. Key investment skills to develop
  2. What is a ‘passive income’ and is it a good thing?
  3. How can I get a tax-free income from property?

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