Hey guys,

The biggest assumption that we make in property is that it will double every 7-10 years. This assumption is based on many years of recorded property prices.

It doesn’t matter whose figures you believe property has consistently doubled in value over the long term.

In fact if you consider that property will double every 10 years then it means it must grow on average at 7.5% per year. This is considering that it only doubles every ten years. For it to double every 7 years it would need to be a huge 10.5% compounded.

Now in truth it does not grow at 7.5% each and every year. The property cycle impacts the rate of growth each year.

If we factor in the effect of the property cycle over the past 50 years we will find that it has doubled every 7.3 years. Now of those 7.3 years it will normally decrease or stagnate 1 year, grown at between 2-5% for 3-8 years and best of all grow between 10-25% for between 2-3 years.

Obviously we all wish every year was a 25% growth year but in reality the bubble would burst at some time and that is something we simply did not want.

It’s armed with this basic knowledge we can safely and confidently build a portfolio knowing it will double in the future.

Let’s consider a real life example of one of my clients David & Mandy. Their property was bought for £135,000 and costs them about £90 per month out of their own pocket. That’s £2160 over 2 years or approximately £10,000 over 10 years.

<>

Now when Dave & Mandy bought the property, the property cycle was stagnant and therefore they had to fund the property for the first 2 years. At this stage they could have remortgaged as the property was now worth £145-£150k but they waited another year. They then remortgage and took out £10,000.

At this point Dave & Mandy had invested just over £3500 into the property but had now made a further £6500.

With this £6500 and some other money they bought a further property which they let out.

A further 2 years on and the original property was worth around £160k. They chose to wait a further 2 years until they pulled out £12,700.

They then bought another property and let it out so they now had 3 in their portfolio plus their home.

Now a further 2.5 years and a funny thing had happen the property which at last remortgage was worth £190,000 had ‘all of a sudden’ jumped to £300,000.

At this point they sold the property for £290,000 and reinvested the capital into a number of other properties. They realised a £114,000 after all costs and capital gains tax.

So £10k + £12.7k + £114k less around £11k = £125,000 profit. Not too bad considering they now had 5 properties in the portfolio and £125k in the bank ready to invest.

Live with passion,

Brett Wood