What return do you expect on your money?
At the moment you can easily get 6.5% - 7% interest on your money from a bank without any risk. Indeed, with a cash ISA you can get this rate tax-free. No hassle, no risk and your money available whenever you want it.
However with inflation getting ever closer to 5%, the real return is only 1.5% - 2%. But at least it is a real return.
So what return should you expect is you’re planning to invest in a company or a property? After all, both involve time and effort, lack of control and real risk. Most venture capitalists will look for a minimum 35% annualised return from a business investment and serial entrepreneurs would expect 20% a year and an element of control of the business.
The majority of experienced property investors are now looking for a 10% return to allow for costs and the inevitable further drop in property values. This equates to a net yield of little more than 7% which, when you go back to what you can get in the bank, makes you wonder why they do it.
What is strange is that most rental property in Sussex is only yielding 4% - 5% (meaning that prices have a lot further to drop) and lots of businesses are earning profits after tax of less than 5% of their capital employed. This defies logic as these property and business owners could all earn much more by selling up and putting the money in the bank. Of course, lots more considerations come into it.
We all know that one day property will bounce back again, but hopefully in a more sustainable way than we have seen recently. Many ‘lifestyle’ businesses are just that – they give their owners an excellent lifestyle that significantly enhances their income, albeit that the bottom line return looks poor.
So before you make any investment, make sure that you understand exactly why you are doing it and what returns you are expecting. It may sound very dynamic and exciting to think about a property or business purchase, but at the moment the banks might be your best bet!
