Firstly, I apologise for my absence on my own blog – I have been away investing and would like to discuss with you what to invest in now, with interest rates still at an all-time low across the globe.
I have just invested in a new business and this has taken up my time – I bought a new business back in October 2010 and will admit that it has taken all my focus for the last 6-8 months. The industry was completely new to me and the learning curve extremely steep – the business designs, manufactures and installs fitted furniture, mostly built in bedrooms and home offices – so it is not only an industry I don’t know, but also I have never run a manufacturing business before!
So if you were to ask me – “What to invest in now?” – I would have to say ‘Invest in a business’, which can either be existing or a new one you start from scratch, which is a continuation of my last post ‘where to invest cash’ and to show the readers of my business blog, I put my money where my mouth is!
You could spend your time looking at the best money investments – the banks; premium bonds; property etc. but ultimately, one of the highest returns you will make is when you buy a business…let me explain further:
If you were to use an ‘investment return calculator‘ you would enter certain information – the period of the investment, the amount of the investment, the return and so on. At the end of the investment period you would achieve a certain level of ‘Return’.
With a business, there are two investment returns to calculate, the first is the ‘cash’ generated from the business each year, which you might choose to take out by way of salary or dividend. Secondly, you have the ‘capital growth and so long as you make the right choices in your new business and it grows over the period of your ownership, then if the amount you sell it for is higher than what you paid for the business in the first place or more than the money you used to set it up from scratch, this represents capital growth. So for example:
If you invested £100,000 in a business and receive a £20,000 annual dividend from it your annual investment is 20%, however if after 10 years you sell the same business for £500,000 your capital investment is 400%, but if you add the two returns together your total return would be 600%, assuming the dividend you take out from the business over the ten years remains at just £20,000, which is unlikely. There is no bank, pension or ISA that would give this level of return on the market, and that is not simply because interest rates are low right now, but this will never be the case.
You will have to do some hard work though – running a business is not for the faint hearted and the risks are much higher, but you can’t expect to get a high return without higher risk and without a bit of work.
The other consideration is that, of the £100,000 used to set up the business or to buy it from another owner, some of this could be borrowed money from a bank. So if for example, you were able to secure a 60% loan on your investment, your own personal capital outlay is now just £40,000.
This makes your return on investment much higher, because you have leveraged your money – which in this case the total return of note above of £600,000 would mean a total return on investment of a staggering 1500%, which might make the answer to ‘What to invest in now?’ much easier.
Very nice post. This idea invest and use money in business is very popular. 😉
Hi Naj, good to have your comment. To answer your question – it depends on many things. Firstly, with regards your initial £100,000 investment in the property, the question is how much the property market is going to gain in the next 5 years. Let’s say this is a conservative 5% per annum from now (which based upon present news is unlikely for the next 12 months), your £100,000 property would be worth £127,628, which represents a total of 27.63% capital growth.
However, when you compare this to a business investment, the returns could be much higher (however, you are right you need to consider the risk factor and argubly, business investment is a higher risk), but also what is most important, you are partly in control of that return. Let me explain, with a property, apart from making sure you invest in the right location etc. and assuming you are not doing any extensions etc. you are dependent upon where the property market goes. However, with a business, if you work hard and do the right things and make the right business investment decisions the business will grow and if you make sure you do this in the right way, your business will be worth a lot more in 5 years, irrespective of what the market conditions are (i.e. you are not dependent on the outside market alone). However, the market conditions in themselves can affect the type of business you buy and the growth thereof of course, but you ask most entrepreneurs, most would agree that now is a good time to either set up in business or to buy one, not least because interest rates are low.
I hope this makes sense, but please ask more questions.
Interesting article Mr Bowyer.
However, please accept my apologies for if I am missing something.
Taking the example of investing in property. If I have a house that is worth £100,000 and a 25% deposit is required my initial outlay would be £25,000 obviously while the other 75% would be leveraged from the bank or mortgage company.
Next, when I stick the property on rent, I am able to collect from the total £600 rent £400 residual income post mortgage payment of £200, every month.
Now, moving on to selling the property five long years later, I have capitalised on the residual income I have been gaining from the let but also should have gained on the capital value of the property.
In terms of an absolute number, I agree with you, investing in a business may provide a higher return but in terms of a percentage, would they not be similar? Or property even more?
Lastly, surely you have to factor risk in to your investment too, as this is a cost and a premium should be added on to the required rate of return as a result of excess risk being taken on. Property would traditionally have less risk?
Would love to know your thoughts on this. First time I came across your blog today and very interesting I must say. In the words of Arnie: “I’ll be back.”
Risk is the most important yet left out parts of this post. Risk changes the future value don’t forget.
I would rather have a 90% chance of a 20% return, than a 0.1% chance of 600% return.
wow it’s a best idea how to invest and use money in business..this article is good n thanks for post it…