Understanding Opportunity Cost When Investing In Property

While most investors have got got involved in property investment because they understand the chances to make money through leverage and capital growing or high yields, I still see and hear of many who do not fully understand chance cost.

Remember anyone that gets into property is usually in it to generate money or income – how many deals/properties you have is insignificant.

So what makes chance cost mean?

Well according to the encyclopedia,
“Opportunity cost is a term used in economics, to intend value the cost of something in terms of an chance foregone (and the benefits that could be received from that opportunity), or the most valuable foregone alternative. For example, if a city make up one's minds to construct a infirmary on vacant land that it owns, the chance cost is some other thing that mightiness have got been done with the land and building finances instead. In edifice the hospital, the city have got got forgone the chance to construct a sporting centre on that land, or a parking lot, or the ability to sell the land to reduce the city's debt, and so on.”
http://en.wikipedia.org/wiki/Opportunity_cost

So in property investment terms, if an investor make up one's minds to put £50k in a property in for illustration Wales, the chance cost would be what he could have made by investment in Spain, Eire or Dubai. Or similarly if an investor make up one's minds to maintain equity of 50k in a property, the chance cost is what he/she could alternatively have invested this money in and the end point value.

Now again this volition depend on your specific strategy – and many people are not too concerned about chance cost, they are just acute to purchase 1-2 places that tin clasp onto for 15-25 old age to utilize as a pension. That is good if that is your strategy – but for me that is too wide a strategy, carries hazards and is not maximising the chances available.

For me I have got always had a philosophy, rightly or wrongly, that I should always be working my money hard. What makes this mean? Well as soon as I experience my money have made a important tax return and the tax returns are likely to drop off, compared to other possibilities, then I volition look at realising my net income and investment elsewhere ie when I experience the chance elsewhere is greater than the current opportunity.

The great thing with property is this makes not necessarily intend selling, as you can refinance, and put money elsewhere.

This is no different to any other type of investing, such as as purchasing pillory and shares – you make/lose your money depending on what terms you paid, and what terms you sold at – although clearly with property is good chance to earn a regular income as well - if clasp onto for 15-25 old age you should do money, but most likely will be a few scares along the way!

To be a successful investor, must cognize when to come in the market, and go forth the market. And the people that make best purchase low, and sell high!

I’ll give an illustration – while purchasing off program have got got got now got a spot of stick in the United Kingdom - I have done it successfully over the last few old age - but the cardinal is having a clear strategy.

For example, by doing all my owed diligence I have managed to purchase property at the right terms in right location, but then sold on within a twelvemonth of completion as I felt that was the time period I would see the upper limit tax returns in - and chances would be greater elsewhere over the adjacent 3 years.

So to travel through the numbers, I have just sold one that I bought off program last twelvemonth 12 calendar months before completion. I bought at a terms that was already £10k below market value based on my research in an country that had small bargain to allow competition. This was secured with lone a £5k deposit. On completion, I set another £28k into sedimentation – so tied up £33k of my ain money. There was no postage duty in this area.

I then set on market on completion, now even with things slowing down in the area, I have got just sold it for a £23k profit. So I tied up £5k for 1 year, and a additional £28k for 6 months, to get back £56k.

Why did I sell? Did I see refinancing?

My first pick would have got got been to refinance and allow out, but the rental would not have stacked up. Sol while the rental would have got got got stacked up at the terms I paid for the property, I would have had 56k in equity sat not doing very much for me. So as I make not calculate huge capital growing in the country over the adjacent 3-5 years, and the output was not attractive adequate for me it was best for me to let go of this equity and happen another investing – ie I felt there were better chances for me to pass my £56,000 on, to generate more than money.

Now clearly when are looking into the hereafter is component of hazard and guess and are no definite replies - so you are having to calculate as well as you can with the information currently available ie how you calculate interest rates, buying/selling costs, supply and demand, employment, the overall economical system and market sentiment over the adjacent clip time period in the markets/regions you are investing/looking to put in.

Although chance cost can be hard to quantify, its consequence is universal and very existent on the individual level. The rule behind the economical conception of chance cost uses to all decisions, not just economic ones, for illustration when Steven Gerrard decided to remain with Liverpool last summer, his home baseball club and where he is captain, the chance cost was what he could have achieved if he had moved to Chelsea. It will be interesting to see what helium make up one's minds this summer- he may now experience the chance cost is too great to turn down.

Hope this do sense, and retrieve to see chance cost when adjacent making an investing decision.