Wait for prices to go up
This is the crunch part of the plan. If prices don’t go up, the plan won’t work (unless you bought substantially below market in the first place).
I’ve heard it said that house prices double, on average, every seven to ten years. Looked at another way, average house prices in the UK have increased by 10-11% per annum since 1948.
However, there are some areas which have traditionally lagged behind these averages, or have even decreased in value. And other areas have beaten these averages hands down. Hence the north-south divide. This is why solid research pays premiums.
Dolf de Roos, the Australian property expert, in his excellent book, Real Estate Riches, advises buying in areas which have consistently beaten the averages on the basis that the chances are they will continue to do so. This is a neat theory, and is worth thinking about. But be careful when you buy. Traditionally London and the southeast have always outperformed the rest of the country. Predictions are that long term this will continue. However, at the moment house prices there are growing less fast, and in some areas even falling, than the north. So look at the long-term trends to get a full picture, short-term variations can be deceptive.
Also, don’t forget that averages hide the fact that growth is never constant – some years will be better and worse than others. This means in practice, and depending on when in the economic cycle you buy, the equity in your property might not have grown sufficiently in say, year five, for you to refinance it. All the growth might occur in year six.
Dolf de Roos also suggests looking at long-term socio-economic trends when buying. In addition to looking for areas where increases beat the national averages, he also advocates looking for properties with an ageing population in mind i.e. properties
- in areas close to the sea
- which will appeal to retirees such as bungalows
To keep things simple, Robert Allen suggests buying a property every year for five years, or, if you need double the income, two properties a year every year for five years.
Of course, depending upon where you are in the economic cycle, it might be better to buy multiple properties one year, and none the next, depending upon available finance and what you think is going to happen to prices in subsequent years.
Here’s to successful property investing.
Peter Jones B.Sc FRICS
Chartered Surveyor, Author & Property Investor