Are you getting serious about property investing? The philosophy in this article will help you build an outstanding portfolio.
Before we dive deep into what fractal economics is, I want to be clear on something – you won’t find anything about it on Google. It’s because fractal economics is a mental model that I came up with.
Fractal economics is a compelling model that synthesizes elements of physics, metaphysics, and financial instrumentology. I also like to frame it as the universal law that powers exponential property portfolio growth.
To better understand what this model is, let me explain its key concepts.
What is a Fractal?
A fractal is an infinitely complex never-ending pattern that, in itself, is similar across different scales. Interestingly, a fractal uses a mathematical recursive integer, which basically means that it expands indefinitely in both directions.
Think about it in this way.
Imagine a nautilus, the shell with a spiral pattern. Each section of the spiral is like a chamber, and each chamber has the same mathematical ratios in-between.
To paint you a clearer picture, the largest chamber within the nautilus is bigger than the previous by a certain percentage. But that percentage is exactly the same for all the chambers.
For example, if the second chamber is 10% bigger than the first, the third chamber will be 10% bigger than the second, and so on.
So as the nautilus gets bigger, it has exactly more cells at exactly the same ratio. The same thing happens as it gets smaller.
This never-ending pattern is what a fractal is, and the principle isn’t isolated to shells either. You can see the same patterns in rivers, mountains, and people’s veins, lungs, etc.
Fractal Economics in Action
Here, I’d like to show you how it would work for your property portfolio and give fractal economics real meaning.
Now, there are a few different factors that we need to consider when buying a property. For example, is it going to produce enough surplus cash flow so we can liquidate future debt? If yes, then the property is cash flow positive, which is great.
Also, you need to consider if you’re buying the property in an area of good capital growth.
Compounding capital growth will give you arbitrage, which has to do with buying, selling, or trading of the same commodity in different market conditions.
The goal of arbitrage is to achieve an advantage over your competition.
With properties, for example, you can use time arbitrage. This means you’re basically buying in one market to gain an opportunity from that property under different market conditions. And in addition to arbitrage, you need the ability to control your asset.
Something very interesting happens when you have the strings in your hands and everything is working in harmony. But let’s use an example to show you what’s so interesting.
You go and buy house number one. You’ve got your deposit, which is 20%. To be exact, you have your 20% deposit for a cash flow-positive property in an area that’s going to grow.
Depending on your timescale, you could let the property grow and then move your equity out afterwards. Or, you could add value to the asset by way of cosmetic renovations.
The key idea is that you need to get enough free equity from that property to purchase another. But if your property isn’t cash flow positive, however, you won’t be able to do that.
How does this relate to fractal economics?
As mentioned, the idea behind fractal economics is to grow and scale your portfolio in the same way and at a predictable rate. So, if you can’t pull equity from your assets and finance the growth, you won’t have a fractal economics scenario.
This means if your first property isn’t able to yield sufficient funds for growth, you won’t be able to propagate the model.
Now, let’s consider the other scenario…
What Happens Over Time
If everything goes well and you figure out the fractal economics model, things get really interesting.
When you have your property number one, you can go and get property number two, number three, and you’re ready for more. Things are going great.
Let’s further assume that this takes you about two years total.
What’s happening here?
You have a scalable, predictable, and quantifiable model to grow your portfolio. And like the nautilus example, your cells are growing in all different directions at the same time.
The moment you have enough equity to cover a 20% deposit, you get another property. Of course, you’d want to get it at the right time and place.
In time, that property will produce enough equity for another deposit. This goes on and on with your other properties, with each starting a whole new branch in your wealth stream.
Soon enough, you’ll have this huge compounding effect.
It may have started slowly in the beginning, but it’s going to get to a point where it’s growing much faster and in many directions.
Are You Ready to Go Fractal?
I’d like to stress that fractal economics is about mathematics. That’s why you should always play out property portfolio scenarios from a mathematical standpoint – there’s no room for emotion.
If you do it this way, it will take only a few years to build wealth.
I also want you to remember that it’s critical to not just purchase any property that comes your way. The asset must be cash flow positive, especially if you don’t have the means to continue to pour money into a property.
The idea is to always invest in properties that can give you the compounding effect to purchase more assets and achieve exponential growth. This is the gist of fractal economics.
Keen to explore your own property strategy?