Capital Growth v Cash Flow
This is an excerpt from Chapter 5, ‘Capital Growth versus Cash Flow’ of Frazer’s upcoming book, The Alternative Guide To Property Investment. You can register your interest in pre-ordering the book by clicking on the button at the bottom of this post.
Capital growth is a very powerful concept. As Albert Einstein once said, compound capital growth is the eighth wonder of the world.
What compound growth means is that if an asset worth £100,000 increases in value by 10% a year it will only take eight years for that asset to be worth more than double its original value. In ten years it will be worth around £259,000. And that’s without leverage.
Imagine that you’re back in 1996. You have £16,000 to invest, but you’re not sure what to do with it. Your stockbroker tells you one thing, your financial adviser tells you another, and your bank manager – of course – reckons you should stick it in the bank for a rainy day.
Instead, you decide to use that £16,000 as a deposit on an £80,000 buy-to-let property in London (that was the average house price in London just 20 years ago).
Two decades on, the average London property is worth over £488,000.
That means, provided you covered your mortgage payments and costs with rental income, your £16,000 has turned into £408,000 profit. Now there may well have been various incidental costs to take into account but, I think it’s fair to say, you would still have done many times better than if you had put that money into a pension or kept it in the bank.
It’s not possible to make the benefits of property investment any clearer than that.
It is, in my opinion, far and away the best investment you can make. Imagine that property only did half as well as this over the next ten years. It would still be likely to produce several times the returns of any other asset class.
Because of the power of compound growth, many people think property is all about capital growth, and that aspect is certainly what helps make it an attractive investment. And the fact that you can leverage purchases and obtain, for example, an 80% LTV mortgage multiplies the rate at which your capital can grow at astonishing rates.
Nonetheless, many people have come unstuck by leveraging highly and speculating on capital growth. They have then found themselves in an unsustainable position having to subsidise mortgage payments as the rental income has not been sufficient to cover their financial outgoings on the property.
You may be able to support one property at £200 a month whilst you wait for it to increase in value, but how many more of those could you afford?
However, if all your properties at least ‘wash their face’ and produce a small profit from rental income, you can support as many of them as you can buy – and benefit from the capital growth in all of them.
To read more about why to invest in property, you can click below to register your interest in the book. Fill in your details, and once the book is released, we will send you more information.