| While most investors have got involved in property | | | | I'll give an example - while buying off plan has now |
| investing because they understand the opportunities | | | | got a bit of stick in the UK - I have done it |
| to make money through leverage and capital growth | | | | successfully over the last few years - but the key is |
| or high yields, I still see and hear of many who do | | | | having a clear strategy. |
| not fully understand opportunity cost. | | | | For example, by doing all my due diligence I have |
| Remember anyone that gets into property is usually | | | | managed to buy property at the right price in right |
| in it to generate money or income - how many deals | | | | location, but then sold on within a year of completion |
| properties you own is insignificant. | | | | as I felt that was the period I would see the |
| So what does opportunity cost mean? | | | | maximum returns in - and opportunities would be |
| Well according to the encyclopedia, | | | | greater elsewhere over the next 3 years. |
| "Opportunity cost is a term used in economics, to | | | | So to go through the numbers, I have just sold one |
| mean the cost of something in terms of an | | | | that I bought off plan last year 12 months before |
| opportunity foregone (and the benefits that could be | | | | completion. I bought at a price that was already |
| received from that opportunity), or the most valuable | | | | £10k below market value based on my |
| foregone alternative. For example, if a city decides to | | | | research in an area that had little buy to let |
| build a hospital on vacant land that it owns, the | | | | competition. This was secured with only a £5k |
| opportunity cost is some other thing that might have | | | | deposit. On completion, I put another £28k |
| been done with the land and construction funds | | | | into deposit - so tied up £33k of my own |
| instead. In building the hospital, the city has forgone | | | | money. There was no stamp duty in this area. |
| the opportunity to build a sporting center on that | | | | I then put on market on completion, now even with |
| land, or a parking lot, or the ability to sell the land to | | | | things slowing down in the area, I have just sold it |
| reduce the city's debt, and so on." | | | | for a £23k profit. So I tied up £5k for 1 |
| So in property investing terms, if an investor decides | | | | year, and a further £28k for 6 months, to get |
| to invest £50k in a property in for example | | | | back £56k. |
| Wales, the opportunity cost would be what he could | | | | Why did I sell? Did I consider refinancing? |
| have made by investing in Spain, Ireland or Dubai. Or | | | | My first choice would have been to refinance and let |
| similarly if an investor decides to keep equity of 50k | | | | out, but the rental would not have stacked up. So |
| in a property, the opportunity cost is what he/she | | | | while the rental would have stacked up at the price I |
| could alternatively have invested this money in and | | | | paid for the property, I would have had 56k in equity |
| the resultant value. | | | | sat not doing very much for me. So as I do not |
| Now again this will depend on your specific strategy - | | | | forecast huge capital growth in the area over the |
| and many people are not too concerned about | | | | next 3-5 years, and the yield was not attractive |
| opportunity cost, they are just keen to buy 1-2 | | | | enough for me it was best for me to release this |
| properties that can hold onto for 15-25 years to use | | | | equity and find another investment - ie I felt there |
| as a pension. That is fine if that is your strategy - | | | | were better opportunities for me to spend my |
| but for me that is too broad a strategy, carries risks | | | | £56,000 on, to generate more money. |
| and is not maximising the opportunities available. | | | | Now clearly when are looking into the future is |
| For me I have always had a philosophy, rightly or | | | | element of risk and speculation and are no definite |
| wrongly, that I should always be working my money | | | | answers - so you are having to forecast as well as |
| hard. What does this mean? Well as soon as I feel | | | | you can with the data currently available ie how you |
| my money has made a significant return and the | | | | forecast interest rates, buying/selling costs, supply |
| returns are likely to drop off, compared to other | | | | and demand, employment, the overall economy and |
| possibilities, then I will look at realising my profits and | | | | market sentiment over the next time period in the |
| investing elsewhere ie when I feel the opportunity | | | | markets/regions you are investing/looking to invest in. |
| elsewhere is greater than the current opportunity. | | | | Although opportunity cost can be hard to quantify, |
| The great thing with property is this does not | | | | its effect is universal and very real on the individual |
| necessarily mean selling, as you can refinance, and | | | | level. The principle behind the economic concept of |
| invest money elsewhere. | | | | opportunity cost applies to all decisions, not just |
| This is no different to any other type of investing, | | | | economic ones, for example when Steven Gerrard |
| such as buying stocks and shares - you make/lose | | | | decided to stay with Liverpool last summer, his home |
| your money depending on what price you paid, and | | | | club and where he is captain, the opportunity cost |
| what price you sold at - although clearly with | | | | was what he could have achieved if he had moved |
| property is good opportunity to earn a regular | | | | to Chelsea. It will be interesting to see what he |
| income as well - if hold onto for 15-25 years you | | | | decides this summer- he may now feel the |
| should make money, but most likely will be a few | | | | opportunity cost is too great to turn down. |
| scares along the way! | | | | Hope this makes sense, and remember to consider |
| To be a successful investor, must know when to | | | | opportunity cost when next making an investment |
| enter the market, and leave the market. And the | | | | decision. |
| people that do best buy low, and sell high! | | | | |