Buy 2 Let beats all other asset classes

Buy-to-let investments have outperformed all major asset classes over the past 18 years, according to a study of the sector. As well as reflecting property price growth over the period, the data highlights the effect of borrowing - or "gearing" - which has hugely magnified total returns. 

 

Every £1 invested in buy-to-let is now worth £14.900, if investors put down a deposit of 25pc and borrowed the rest via buy-to-let mortgages. These specialist loans first became available in 1996, the point from which performance is calculated. This has produced net annual returns 16.2pc over the past 18 years, compared with 6.5pc if the same amount was put into the stock market. Cash buyers who poured money into buy-to-let 18 years ago have now turned £1 into £5.07 – a net annual return of 9.4pc. 

The study, published by former economist Rob Thomas, found that landlord returns outstripped the earnings from investments in cash, stocks and shares and commercial property. In the same time-frame, commercial property investments turned £1 into £4.49. 

Cash savings were the worst performers, according to the report, where £1 is now worth just shy of £2. The study did not include gold, which has fallen fast in recent years but was the best performing asset in the previous decade. 

 

 The vast returns on buy-to-let were helped by low interest rates. This low-cost "leveraging", coupled with rising prices for most of the period, helped amateur landlords build equity against which to borrow again, repeating the process to profit further. 

 

The research assumed that buy-to-let investors who took out a mortgage started with a single property, and later reinvested in more properties when they earned enough to put down another 25pc deposit. 

By contrast, the report assumed re-investments by cash investors who also started with a single property would only be made when they had gained enough to buy another property outright.

For example, if a £100,000 home bought in 1996 is now worth £300,000, a capital gain of £200,000, the cash buyer would have trebled their investment. 

But if they put down a £25,000 deposit, financing the property instead with a 75pc loan-to-value mortgage, the buyer will have turned their equity of £25,000 into £125,000 – a gain of five times their investment. This capital gain can be used to re-mortgage the property, releasing equity to finance another house purchase. 

This is the unique feature of buy-to-let as an investment, said Mr Thomas. "The investor can borrow against it and, when property prices have risen, remortgage to provide cash to buy more property."

http://www.telegraph.co.uk/finance/personalfinance/investing/buy-to-let/11520110/Buy-to-let-returns-beat-all-other-mainstream-investments.html