I think you probably underestimate yourself. One doesn't need to be an accountant or lecturer, since it's all very simple arithmetic - but one does need the ability ('common sense'?) to think of all the factors which are relevant, and therefore have to be fed into that arithmetic. ... and, of course, even some economists or academics may not have considered all thee factors!
For example, moving to SUNRAY's position, as I've been trying to explain to him, in comparison with the figures I posted yesterday, the goalposts move a long way if, instead of have £100,000 in cash to invest, one takes out a mortgage to buy a property (essentially 'investing a loan').
As my figures illustrated (with the assumptions I used), if one has £100,000 cash to invest in a house one is going to rent out, then after 25 years, one's 'wealth' will have risen to some £645,654, representing a gain of about £546k relative to one's initial £100k cash investment.
However, if, per SUNRAY in order to buy the £100k property, one has forked out a £20k deposit and then take out a 25 year BTL mortgage on the remaining £80k (and let that mortgage run for its full 25 years) then if one works with a mortgage interest rate of 4.5% (probably not unreasonable in comparison with most of the past few decades), he would have paid out about £133k in repayments which plus the £20k deposit would amount to total 'losses' of about £153k. His 'gain' over the 25 years would thus have reduced from about £546k (had he invested cash) to about £393k - which if you look at it (not totally appropriately) as 'average gain per year', would represent an average gain of about £15,720 per year over the 25 years. That's still not at all bad, but it will obviously compares a lot less favourably with investment in, say, gold than would be the case had the property been bought for cash.
In fact, essentially the same would be true of investment in gold if, rather than buying the gold with cash, one took at a loan to finance purchase of the gold.
So I guess the question to ask your economics professor would have been whether he was thinking about investing 'spare cash' or whether he was thinking of the situation (as with BTL mortgages) in which one was 'investing' money which one had had to borrow (hence repay, with a lot of interest).
Kind Regards, John
Using your figures (which are way over the actual values):
I've had a
very quick flick through my accounts and this quick precis is based mostly on the dates of mortgate settlement.
I opened a bank account and deposited 25K from 'savings'.
I invested 20K for deposit and let's say 5K for purchase and general start-up costs eg solicitors, decorating etc
Borrowed 80K interest only.
1-2 years later I made a similar investment but now the purchase price was 25% higher So I put in 25K + 5K in 'the bank', borrowed 100K interest only.
Another year later another property but 60% higher (a better property) so I put in say 25K, and the other half was already in 'the bank' borrowed 120K repayment.
The rent coming in was way more than mortgage repayments, aided by dropping interest rates and increasing rents I paid as much off the mortgages as I could, especially first and third (best option for T&Cs). Over paying an interest only loan pays off the capital and hence the interest drops
By 9 years the 1st loan and capital was paid off and deeds sent to me.
By 11 the years the 3rd loan was paid off and deeds sent to me.
Then dumping profit into 2nd mortgage (paying £1600 where £120 was due) cleared it by 13 years. (<11 years of loan).
For info I paid the last
4K over phone with credit card to clear the debt in a hurry as a time limited offer was in place to extend the lease, admin cost by mortgage company for it was going to be
£500+VAT and subject to delaying the process. Solicitors cost reduced by from
£300 to £100+VAT.
Moving to 24 years, spending ~560K on this latest property leaves 1200K in 'the bank'. So enough to by 2 more and not the 3-4 I estimated.
Current value of properties ~2000K meaning my investment of 80K and relatively little labour time has yielded 3200K (2600K allowing for CGT)
As mentioned these figures are way over the true amounts but I've left them at your starting point and roughly at the same ratio, apart from those real figures in
red.
I don't see any particular reason why this latest property should behave any differently.
