The Practicalities of Property

Last time we discussed different property investments. See ‘A Different View of Property Investment‘. Now let’s look at a practical example.

schoolbooks1Gordon is a 38 year old professional expat who is likely to stay abroad for his entire career. Married with two children he is thinking about their tertiary education which will start in 15 years. Three years university for each child will cost £28,000 pa, making a total of £28,000 x 3 years x 2 children = £168,000 today. Forward projecting this at an inflation rate of 5% pa equates to a total of more than £360,000.

A traditional savings plan of £870 per month for 18 years would cover this cost. Gordon will have input £187,920 from his earnings into this plan. Instead Gordon decides to invest in a London property. Whilst we all know that history is not a true guide to the future, London has delivered consistent returns over a long period.

An apartment is chosen at £350,000. Gordon secures a mortgage of 70% LTV; £227,500 over twenty years. His initial deposit comes from savings. At 5% pa the monthly cost is £948 for the interest only mortgage. Lower rates can be secured for owner occupiers, but higher rates apply for buy-to-let. There will be sufficient rental income to cover costs with a surplus which Gordon decides to invest. A tenant is secured and the property becomes financially self-sufficient.

Fast forward fifteen years. At a modest rate of 5% pa growth rate the property is now valued at £637,100. Gordon has input nothing along the way and has an asset with a net gain of £637,100 less £227,500 mortgage principal, making £409,600. He also has a nest egg from the rental surplus in excess of £100,000. He clears £509,600, more than four times his initial investment of £122,500, equating to a compounded gain of 9.54% pa.

Gordon can now buy an unencumbered property which can fund the children’s university education. The property is an asset to use further in financial planning for his own retirement. He can liquidate this at a time when markets are favourable or simply enjoy the income.

This example shows good use of gearing an asset. Sometimes good debt can work well in your favour. Gordon has used the rental income to service the debt, making it cost free. This methodology is used by astute investors who formulate a plan with their adviser. Here we have used a single property purchase benefitting from the power of leverage.

One thing to be careful about is that property is a singularly high asset value. Overexposure could create diversity risk to your overall asset allocation.

Contact me if you would like to discuss how the Practicalities of Property may benefit you.


Questions to the author can be directed to PFS International on 02 653 1971 or email

Andrew Wood has been an expat in Asia for 35 years and is Executive Director with PFS International Consultants Co. Ltd.. He has been writing Net Worth articles for eight years and has made a significant contribution to the PFS library of financial service articles dating back over eleven years. These articles which cover the complete A-Z of financial planning are available to readers on request.


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