The Magic of Compounding in Property Investment

Anyone investing in the stock market knows the importance and the beauty of compounding interest that you get on your cash invested. However, many new property investors thinking about entering the property market may overlook this same factor especially when considering the leverage you can get on your assets unlike in stocks and shares, more on this below.?

There are 3 keys factors to earning returns on your cash invested in the property; rental income, rental growth and the biggest of all is capital growth. The long-term UK average for capital growth is between 6 to 8% annually; in 1951 average house price was just shy of ￡1,900 and as of May 2022 this increased to ￡286,000. The rental growth is on average between 2% to 4%, although we all know it has been more than double this over the last year in many populated parts of the country.?

Now on to the leverage part I mentioned at the start, you can get a mortgage on the 75% of the value of the house you purchased leaving you with forking out just the 25% deposit plus fees and Stamp Duty. Try doing that when you are buying stocks and shares, you will likely be laughed your way out of the bank???. But guess what?! The capital growth which you get is of course on the full price of the house and not just on your 25% of the deposit. So what does this mean and how it can help you?

Lets say you have around ￡100,000 to invest right now in property to build your future pension pot or generational wealth to pass down to your kids. With this you can purchase 2 houses worth ￡150,000 each (including deposit, Stamp Duty and other fees) in a good investment area like Nottingham where we help clients purchase investment properties. Now for the rental income, you can get around ￡2,700 per year after deducting all your operational expenses and the current mortgage interest of around 4.5% from your rental earnings.

Fast forward 5 years with conservative capital growth of 4% (remember the UK average over long term is higher) and rental income growth year on year of 3%, and you can now purchase 1 new house in the 6th?year, WITHOUT adding any more of your cash, by re-mortgaging both your houses at 75% Loan-To-Value (LTV) at the new increased value of your houses. To break it down, both your houses after 5 years of 4% capital growth are now worth ￡182,500 each. You now have 3 houses increasing in value and earning you rental.?

Now fast forward only 3 more years, with same capital and rental growth year on year for all 3 of your houses, followed by re-mortgaging of all your 3 houses at the end of your 8th?year at the same 75% LTV. This will now allow you to purchase 1 more house. Now fast forward only 2 more years, follow the same process on all your 4 houses, and you can purchase 1 more house still WITHOUT adding anymore of your own cash. You must now see the trend in how quickly it’s allowing you to buy houses. Now move forward only 1 more year and the growth and income from your 5 houses allows you to buy 1 more house. You now have a portfolio worth over ￡1million!!????After this point you can buy 1 or more houses, comfortably every year after that.?Now imagine if you did put in more of your savings beyond the initial ￡100,000, and this process would be accelerated even further.

DISCLAIMER: This is not a personal financial or investment advice, please always consult your personal financial advisor for a tailored advice on what investment is suitable for you.