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Successful Investing

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What are the concepts to successful investing?

There are many concepts to investing in property that must be understood before you can increase your success:

  • Opportunity Costs - the true cost of what you have given up to achieve your chosen objective
  • Return on Investment (ROI) – total profit expressed as % of amount of cash originally invested
  • OPM (Other people´s money) or Gearing – borrowing funds to increase buying power
  • LTV (Loan to value) – ratio of loan (mortgage) expressed as a % of the value of property when mortgage kicks in

Opportunity Costs

The real cost to an investor is the cost of what he has to forego in order to have an alternative. In this instance the ROI will be the deciding factor as to whether the opportunity is good or not.

Return on investment

In simple terms ROI is calculated by the following formula:

Profit/Cash Invested x 100

The important thing to remember when working out true ROI is to take into account all COSTS as well.

Example:

John bought a property in Spain in 2002 for 120K€ borrowing 70% of the purchase price from the bank. He sold it in 2006 for 250K€. The buying costs in Spain are around 10%

His personal investment was 36K€ and he borrowed 84K€. His buying costs at the time were 12K€ and his profit is 250K€ -120K€ = 130K€ less his buying costs meaning true profit is 118K€

Therefore his ROI is profit (118K) / Cash invested (36K) x 100 = 327% ROI

Gearing

Gearing has many advantages and the property market is one investment market where you can really use the OPM (other peoples money) phenomenon to make gearing work for you. You take a mortgage out on a property (ie use the banks money to buy the property) and through rental you pay back the loan with your income, meaning your personal outlay is minimum.

Gearing can be disadvantageous in terms of cash flow and financial risk especially in markets that are in the first stage of the market cycle with prices and demand falling.

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