Get rich quick?....not really

I was asked again today, for what seems like the thousandth time, 'How quickly will buying below market value properties make me wealthy?'

As you can imagine, three is no standard answer to that, however I often feel that those people asking it are assuming that the answer from me will be 'very quickly'. Most people assume that because there are big equity gains to be made if you master the art of finding below market value deals (bmv deals), then it follows that you can make yourself into a millionaire very quickly.

Actually, you can.....

If you bought 30 properties at £35,000 below what they are really worth then you will have created yourself wealth of just over £1 million. You would certainly be able to say you are a millionaire. However, if you were going to trade (sell) these houses immediately, without holding them as an investment, then you would probably find yourself paying tax at a rate of 40% of your profits. You would also, very importantly, lose the asset (the house) and would therefore not be able to benefit from its growth in future.

To negate that situation, you could hold the houses over time and become an investor as opposed to a trader. The problem with this is that your profit of just over £1million (and growing over time) is not liquid - it is tied up in property. So it looks good on paper - but you cant get your hands on all that lovely cash - which can be off putting for many people - those who want a Ferrari NOW..

The other matter to be aware of here is that whilst 30 properties at £35,000 below true market value each is nowhere near impossible to source - it wont happen overnight - it all takes time and patience.

I mislead you again somewhat here because it is humanly possible to find 30 houses discounted heavily in a short space of time, lets say 12 months, but the logistics and risks involved are akin to you driving your car constantly at 150mph on the motorway over a long period of time. Basically, you are asking for trouble - you will probably crash, burn and hurt yourself badly!

So, whichever way you look at it, as with many things in life, the middle option is probably the best. This is what I try to educate people about - to be business-like and ALWAYS buy well below market value (this allows you to buy today's house at a price of say 5 years ago - thus saving you time). Also to have patience - patience to make a second profit over time. so if you made £35,000 through good negotiation when you bought the property, AND you are prepared to wait another 5 years minimum to make say another £35,000 capital growth - making £75,000 in total for one house - then how many houses do you really need to achieve your goal?

Many newcomers tell me they are going to buy 20 houses per year for 5 years. I tell them that unless they have incredibly massive financial goals, or a massive ego that needs to be massaged, then they should aim lower. its crazy to put oneself under massive pressure - especially when it isn't required! 100 houses is too many for most people.

Not many people actually need more than 10 houses - as long as they do the right things right. I repeat, they should buy very cheap, and be prepared to sit on their hands and wait for even more profit.

Just 2 houses per year for 5 years on this basis (£35k initial profit/£35k growth profit) would make 70k per house over ten years - or almost three quarters of a million pounds.

Do this for ten years and it doubles (20 houses @70k = £1.4million). If we assume that you don't automatically sell each house after it hits its ten year ownership mark...then the capital growth will, more than likely, increase over time too - giving you even more!

If you are holding these houses as an investor - you will be renting them out too. This example mentioned doesn't even take into account the monthly profits on rents received (especially in say years 3-5 onwards as you increase rents in line with market rises) - that would be a very welcome bonus!

The only real 'catch' to this 5 or 10 year plan is that you have to exercise some patience.

its called delayed gratification. Unless you desperately need to sell a house which you've just bought for £35k bmv - then why not sit on it - and ultimately make more money long-term? Sit on it like a farmer lets a hen sit on an egg - rather than take the egg and sell it. The farmer is rewarded with a chicken that he or she can either sell for meat or use to lay even more eggs if he is patient and waits a bit longer - rather than eat or sell the original egg.

If you are interested in making your wealth via property, but feel a little deflated now knowing that you should really wait 5, ideally 10 years before you think of 'cashing in' - ask yourself this.

If I don't get into the game, in ten years time I will still probably be ploughing the same old furrow in the same old, or similar, line of work. I will have wasrted that time, and, worse still, i will be cursing myself by saying something like 'That house down the road was worth 100k 10 years ago - its worth 150k now. Ive I'd bought one like that at 70k then - I'd have made 80k now! what if i'd bought one per year like that for ten years? that would be almost £1million!'

And thats why I hear another thing very regularly these days from people who have sat on the fence 'I wish I'd got into property when it was really cheap - in the nineties'

Doesn't it make sense to have a 10 year (or 520 week - if that's sounds more attractive to you) plan?

Until next time.....