By looking at many varied portfolios it is amazing to see all the different strategies and performances of different portfolios.

What return would I be looking for across the board? I would be looking for a minimum of 30% returns per annum on investment ie my equity to increase by a minimum of 30% per annum.

So if you have a portfolio worth £1 million with £300,000 in equity, you would be looking for your equity to have risen to £390,000, ie your portfolio to be worth a minimum of £1.09 million, assuming a neutral cashflow, this is crucial, as if you have had negative cashflow you will require a higher return on capital growth, vice versa if you have had a positive cashflow, you may not require quite as high capital growth.

Ie a 9% capital growth across your portfolio above will give a 30% return on investment. Pretty powerful? And if this compounds up over 5 years you will get a fantastic return.

Now if we look at the same portfolio value ie £1 mil, and you have just £150,000 equity this time ie 15% equity and the portfolio still increases in value by 9%, what return on investment would this give you overall, again assuming a neutral cashflow?

Well it is going to be double, as you have half as much money invested but have had the same returns.

Therefore you will have seen a huge 60% return on your investment. This shows that capital growth is so crucial when investing and therefore choosing markets that are undervalued compared to nearby markets or have economic reasons for growing over the next 5 years ie mortgage markets opening up, strong economic growth.

The 2 big mistakes investors can make in not seeing as strong returns as this are:

1) Buying in a market that is not going to give them capital growth

2) Putting too much money into each deal

If a property has risen in value, but it is hard to release the equity as the rents do not stack up, it is worth considering selling this property and re-investing in a faster growing market.

This whole idea of never selling a property does not make good business sense �” you need to be aware of your market and the opportunity costs ie what gains you could get by selling and re-investing and at times it will make sense to sell and re-invest elsewhere.

For example I bought and sold new build properties within the space of 6 months of owning them a few years ago, because I felt that would give me a quick return but did not feel holding onto them longer term would give me as strong a return as investing that money in a market that was at the early stages of its growth cycle.

It is worth looking at your portfolio, this should highlight the importance of good leverage, and buying in undervalued markets as capital growth is crucial to achieve a minimum of 30% returns on your investment.

While most investors have got involved in property investing because they understand the opportunities to make money through leverage and capital growth or high yields, I still see and hear of many who do not fully understand opportunity cost and therefore do not maximise their profits.

Remember anyone that gets into property is usually in it to generate money or income, how many deals/properties you own is insignificant, but I meet some investors who feel it is all about buying as many properties as they can and never selling, irrespective of performance or other opportunities.

So what does opportunity cost mean?

Well according to the encyclopedia, “Opportunity cost is a term used in economics, to mean the cost of something in terms of an opportunity foregone (and the benefits that could be received from that opportunity), or the most valuable foregone alternative. For example, if a city decides to build a hospital on vacant land that it owns, the opportunity cost is some other thing that might have been done with the land and construction funds instead. In building the hospital, the city has forgone the opportunity to build a sporting center on that land, or a parking lot, or the ability to sell the land to reduce the city’s debt, and so on.”

So in property investing terms, if an investor decides to invest £50k in a property in for example Wales, the opportunity cost would be what he could have made by investing in Spain, Ireland or Dubai. Or similarly if an investor decides to keep equity of 50k in a property, the opportunity cost is what he/she could alternatively have invested this money in and the resultant value.

Now again this will depend on your specific strategy and many people are not too concerned about opportunity cost, they are just keen to buy 1-2 properties that they can hold onto for 15-25 years to use as a pension. That is fine if that is your strategy, but for me that is too broad a strategy, carries risks and is not maximising the opportunities available.

I have always had a philosophy, rightly or wrongly, that I should always be working my money hard. What does this mean? Well as soon as I feel my money has made a significant return and the returns are likely to drop off, compared to other possibilities, then I will look at realising my profits and investing elsewhere ie when I feel the opportunity elsewhere is greater than the current opportunity, after costs are taken into account.

The great thing with property is this does not necessarily mean selling, as you can refinance, and invest money elsewhere.

This is no different to any other type of investing, such as buying stocks and shares �” you make/lose your money depending on what price you paid, and what price you sold at although clearly with property there is a good opportunity to earn a regular income as well. If you hold onto a property for 15-25 years you will make money, but most likely there will be a few scares along the way, as the market passes through several cycles!

To be a successful investor, you must know when to enter the market, and leave the market. And the people that do best buy low, and sell high!

I’ll give you an example. By doing all my due diligence I bought a property at the right price in the right location, but then sold on within a year of completion as I felt that was the period I would see the maximum returns in. And more importantly, the opportunities would be greater elsewhere over the next 3 years.

So to go through the numbers, I have just sold a property 6 months after completion, that I bought off plan last year 12 months before completion. I bought at a price that was already £15k below market value based on my research in an area that had little buy to let competition. This was secured with only a £5k deposit. On completion, I put another £28k into the deposit so tied up £33k of my own money. There was no stamp duty in this area.

I then put the property on the market on completion, now even with the market slowing down slightly in the area, I sold it for a £23k profit. So I tied up £5k for 18 months, and a further £28k for 6 months, to get back £56k 6 months later.

Why did I sell? Did I consider refinancing? My first choice would have been to refinance and let out, but the rental would not have stacked up at the new valuation. So while the rental would have stacked up at the price I paid for the property, I felt that I would have had 56k in equity sat not doing very much for me for the next 3 years in this property investment. And I felt that there were better opportunities for my money both here in the UK, in different regions, and in several overseas markets, which would give stronger returns ie the opportunity cost was too great.

How can I tell this?

Clearly when we are looking into the future there is an element of risk and speculation and there are no definite answers. So you are having to forecast as well as you can with the data currently available ie how you forecast interest rates, buying/selling costs, supply and demand, employment, the overall economy and market sentiment over the next time period in the markets/regions you are investing/looking to invest in.

I do not forecast huge capital growth in the area over the next 3-5 years, for a range of reasons. The main reason being that the prices are now pretty high compared to the average salary, and the rentals are not as attractive for an investor at the price I sold up at, around 5% gross yield.

As the yield was not attractive enough for me it was best for me to release this equity and find another investment, ie I felt there were better opportunities for me to spend my £56,000 on, to generate more money.

Although opportunity cost can be hard to quantify, its effect is universal and very real on the individual level. So, in conclusion, what does this mean for a property investor?

Well, I would say always be looking at your equity/investments and looking at how well they are performing. If you have money tied in a property that you think will go up in value over 15 years, but may not go up for the next 5 years, is this the best place for your money?

It is no different to the stock market, you must keep an eye on market movements and other opportunities. By working your money hard, and maximizing potential leverage, you can maximize the opportunities out there.

Luckily real life is not decided by the roll of a dice, allowing you to gain equal access to every choice property out there. You just have to go and look for it. Take the scenario where you find a rental property with appraisal value of $100,000 and a selling price of $80,000. Monthly installments on a 80% mortgage amounts to $1,000 (for clarity sake), with a rental income of $1,800 – giving you an estimated positive cashflow of $800 per month (neglecting other deductions in this example for simplicity). In other words, after your 20% cash deposit, the property will pay for itself, in excess of an extra $800 cash in your pocket every month! You will not get this when buying a car, boat, golf clubs or any other luxuries.

The real test will be to obtain these gem properties, because they do not lie around every corner. So, for starters, you should try to put away some money every month until you have at least $10,000 available to obtain your first property. A good credit rating also helps in obtaining a decent mortgage deal from the bank. While busy saving you can invest in knowledge of real estate investing, as well as screening potential properties currently on the market. A good place to start will be bank repossessed properties and foreclosures. Try to attend as many real estate investing seminars, workshops, etc., and read as many literature on the subject.

If you are serious about making it in Real Estate Investments be prepared to put in a lot of time in gaining knowledge on how to acquire real estate deals of the century. Talk to mortgage brokers, financial planners, real estate agents, etc. to gain the necessary momentum. Here’s to making it big in property investing! To read another topic on different site categories, please visit recursion, strojmat, maesc, cubaaction, dengarblog, soahubs, doktermuda, ririn’s, bazzanella, playyourpart, sielmob, spazphotos, and groesbecktennis.

Remember anyone that gets into property is usually in it to generate money or income, how many deals/properties you own is insignificant, but I meet some investors who feel it is all about buying as many properties as they can and never selling, irrespective of performance or other opportunities.

So what does opportunity cost mean?

Well according to the encyclopedia, “Opportunity cost is a term used in economics, to mean the cost of something in terms of an opportunity foregone (and the benefits that could be received from that opportunity), or the most valuable foregone alternative. For example, if a city decides to build a hospital on vacant land that it owns, the opportunity cost is some other thing that might have been done with the land and construction funds instead. In building the hospital, the city has forgone the opportunity to build a sporting center on that land, or a parking lot, or the ability to sell the land to reduce the city’s debt, and so on.”

So in property investing terms, if an investor decides to invest £50k in a property in for example Wales, the opportunity cost would be what he could have made by investing in Spain, Ireland or Dubai. Or similarly if an investor decides to keep equity of 50k in a property, the opportunity cost is what he/she could alternatively have invested this money in and the resultant value.

Now again this will depend on your specific strategy and many people are not too concerned about opportunity cost, they are just keen to buy 1-2 properties that they can hold onto for 15-25 years to use as a pension. That is fine if that is your strategy, but for me that is too broad a strategy, carries risks and is not maximising the opportunities available.

I have always had a philosophy, rightly or wrongly, that I should always be working my money hard. What does this mean? Well as soon as I feel my money has made a significant return and the returns are likely to drop off, compared to other possibilities, then I will look at realising my profits and investing elsewhere ie when I feel the opportunity elsewhere is greater than the current opportunity, after costs are taken into account.

The great thing with property is this does not necessarily mean selling, as you can refinance, and invest money elsewhere.

This is no different to any other type of investing, such as buying stocks and shares �” you make/lose your money depending on what price you paid, and what price you sold at although clearly with property there is a good opportunity to earn a regular income as well. If you hold onto a property for 15-25 years you will make money, but most likely there will be a few scares along the way, as the market passes through several cycles!

To be a successful investor, you must know when to enter the market, and leave the market. And the people that do best buy low, and sell high!

I’ll give you an example. By doing all my due diligence I bought a property at the right price in the right location, but then sold on within a year of completion as I felt that was the period I would see the maximum returns in. And more importantly, the opportunities would be greater elsewhere over the next 3 years.

So to go through the numbers, I have just sold a property 6 months after completion, that I bought off plan last year 12 months before completion. I bought at a price that was already £15k below market value based on my research in an area that had little buy to let competition. This was secured with only a £5k deposit. On completion, I put another £28k into the deposit so tied up £33k of my own money. There was no stamp duty in this area.

I then put the property on the market on completion, now even with the market slowing down slightly in the area, I sold it for a £23k profit. So I tied up £5k for 18 months, and a further £28k for 6 months, to get back £56k 6 months later.

Why did I sell? Did I consider refinancing? My first choice would have been to refinance and let out, but the rental would not have stacked up at the new valuation. So while the rental would have stacked up at the price I paid for the property, I felt that I would have had 56k in equity sat not doing very much for me for the next 3 years in this property investment. And I felt that there were better opportunities for my money both here in the UK, in different regions, and in several overseas markets, which would give stronger returns ie the opportunity cost was too great.

How can I tell this?

Clearly when we are looking into the future there is an element of risk and speculation and there are no definite answers. So you are having to forecast as well as you can with the data currently available ie how you forecast interest rates, buying/selling costs, supply and demand, employment, the overall economy and market sentiment over the next time period in the markets/regions you are investing/looking to invest in.

I do not forecast huge capital growth in the area over the next 3-5 years, for a range of reasons. The main reason being that the prices are now pretty high compared to the average salary, and the rentals are not as attractive for an investor at the price I sold up at, around 5% gross yield.

As the yield was not attractive enough for me it was best for me to release this equity and find another investment, ie I felt there were better opportunities for me to spend my £56,000 on, to generate more money.

Although opportunity cost can be hard to quantify, its effect is universal and very real on the individual level. So, in conclusion, what does this mean for a property investor?

Well, I would say always be looking at your equity/investments and looking at how well they are performing. If you have money tied in a property that you think will go up in value over 15 years, but may not go up for the next 5 years, is this the best place for your money?

It is no different to the stock market, you must keep an eye on market movements and other opportunities. By working your money hard, and maximizing potential leverage, you can maximize the opportunities out there. To read another topic on different site categories, please visit recursion, strojmat, maesc, cubaaction, dengarblog, soahubs, doktermuda, ririn’s, bazzanella, playyourpart, sielmob, spazphotos, and groesbecktennis.