It’s no secret; investors harness the power of compound interest in order to optimise their returns on investment. It is no less the case for Property Moose investors. The most seasoned investors regularly invest new capital in addition to reinvesting their interest/yield/rent which accelerates the exponential nature of their investments (1) (see Graph 1).
Graph 1: Fixed investment amount vs. compounded portfolio value.
Graph 1 is a representation of exponential growth over a 25-year term based on nominal figures. Y axis = portfolio value
An everyday investor contributing £100 each month at an average of 7% net compound interest over 25 years (where an additional £100 plus the interest on the amounts already invested is reinvested) builds a net fund of £81,479.71 (2) as demonstrated in Graph 2. Would you miss £100 per month?
Graph 2 is a representation of projected portfolio value with regular compound investments of £100. Y axis = cumulative value of investments.
For the sophisticated investor looking to build wealth more rapidly, a £1,000 per month investment may yield more attractive returns:
- £12,000 invested annually at £1,000 per month
- 25 years’ worth of consistent investments
- Total of £300,000 invested
- £514,797.11 earned in yield (if yield is 7%)
- Totalling a fund of £814,797.11 after 25 years (2)
See graph 3
Graph 3 is a representation of projected portfolio value with regular compound investments of £1,000. Y axis = cumulative value of investments.
Crucial to the success of compounding is the number of compounding cycles with which interest/yield/rent is paid during the investment term. According to Windgate Wealth Management (3), “it pays to start now”, for exactly this reason. In the case of Property Moose, interest/yield is earned monthly meaning there are 12 compounding cycles each year; 300 over 25 years. Compare this with other platforms that pay rent only every 6 or 12 months and the effect could be significant:
- Over the same term, at £1000 per month invested monthly
- Rent/ Yield applied every 6 months and reinvested
- £300,000 total invested
- £501,958.03 earned in interest
- Total fund amount of £801.958.03 (2)
- A £12,839.08 deficit - 1.6% worse off
1.6% may not sound significant however, what does 1.6% equate to at those figures over that term? (prices accurate at 9/3/2024)
- potentially a new car in retirement (5)
- 9 holidays (6)
- 12 years’ worth of Christmas presents (7)
- 8 years’ worth of home gas and electricity bills (8)
- 3 years’ worth of childcare from a UK registered childminder (9)
- 1 year of a Nanny 25 hours per week (9)
High Net Worth Investors looking for accelerated wealth accumulation and optimal compound interest may invest upwards of £5,000 in property via the Property Moose Platform. Over 25 years at 7% interest annually and by reinvesting all yield this could resemble (2):
- Monthly compounding and reinvesting cycle
- £5,000 invested monthly plus reinvestment of yield
- 25 year investment term
- Total of £1.5million invested
- £2.57million earned in compound interest
- Total fund amount of £4.07million + any capital gain from sale of properties along the way
Graph 4 is a representation of projected portfolio value with regular compound investments of £5,000. Y axis = cumulative value of investments.
The effect of compound interest in each of the scenarios is that ultimately, the amount of interest earned is 1.713 (71.3%) times higher than the amount of capital invested monthly.
The wonder of investing in an asset such as property that accrues interest is that the figures above do not make reference to any capital gain achieved. The Savills HPI projects an average of 4.5 - 5.6% growth across UK property market in 2016 (4), increasing the potential growth achieved by your investment portfolio.
Please get in touch with one of the team to learn more.
Disclaimer and Legals
Property Moose does not provide any advice in relation to investments and you must rely on your own due diligence before investing. Please remember that property prices can go down as well as up and that all figures, rates and yields are projections only and should not be relied on. If in doubt, please seek the advice of a financial adviser. Your capital is at risk if you invest. Please note that forecasts are not a reliable indicator of future results. This post has been approved as a financial promotion by Resolution Compliance Limited.
Property Moose is a trading name of Crowd Fin Limited which is an Appointed Representative of Resolution Compliance Limited which is authorised and regulated by the Financial Conduct Authority (no: 574048).
References:
- http://www.businessinsider.com/compound-interest-monthly-investment-2014-3?IR=T
- http://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php
- http://windgatewealthmanagement.com/the-power-of-compound-interest-and-why-it-pays-to-start-saving-now/
- http://www.savills.co.uk/resources/5-year-forecast/
- Model: VW Polo SE as at 9/3/2024 http://www.volkswagen.co.uk/new/polo-gp/configure
- http://www.lloydsbankinggroup.com/Media/Press-Releases/2014/halifax/average-overseas-holiday-now-costs-more-than-1400-per-person/
- http://www.thisismoney.co.uk/money/bills/article-3348285/Generous-Britons-spend-far-nation-Christmas-gifts-two-separate-studies-suggest.html
- https://www.ovoenergy.com/guides/energy-guides/the-average-gas-bill-average-electricity-bill-compared.html
- https://www.google.co.uk/search?q=uk+childcare+costs&oq=uk+childcare+costs&aqs=chrome..69i57j0l5.4367j0j4&sourceid=chrome&ie=UTF-8
