Michael Yardley of Metropol Properties has an interesting comparision on cashflow/growth in his latest newsletter.
Quote
If you have any doubt about the importance of capital growth, the calculations in the table below may change your mind.
Imagine you bought a property worth $300,000 in a poor growth area delivering 5% capital growth and 10% gross rental return; in 20 years your property will be worth $795,989.
If you bought a different property for $300,000 in a high capital growth area showing 10% per annum capital growth and 5% rental return the property will be worth $2,018,250 at the end of the same period.In the meantime the rentals on this property will also grow substantially and slowly catch up to the rentals you would achieve on the first property.
And the real bonus is you will be able to access the extra equity in this property and borrow against it, so that you can buy further investment properties. This is very difficult to do when you have a property with poor capital growth.
10% capital growth 5% rental return on property value 5% capital growth 10% rental return on property value
Year 1 $330,000 $16,500 $315,000 $31,500
Year 5 $483,153 $24,158 $382,884 $38,288
Year 10 $778,123 $38,906 $488,668 $48,867
Year 15 $1,253,174 $62,659 $623,678 $62,368
Year 20 $2,018,250 $100,913 $795,989 $79,599 [/i]
Unquoteany comments?
Terryw
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
That table didn’t paste very well.
The figures for High growth property are:
10% capital 5% rental return Growth on property value
Year 1 $330,000 $16,500
Year 5 $483,153 $24,158
Year 10 $778,123 $38,906
Year 15 $1,253,174 $62,659
Year 20 $2,018,250 $100,913The figures for cashflow property are:
5% capital 10% rental return
Growth on property value
$315,000 $31,500
$382,884 $38,288
$488,668 $48,867
$623,678 $62,368
$795,989 $79,599Terryw
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terry, I agree. cap growth is the key for long term strategies. while we may feel the pinch in the initial phase (CF-ve) the equity build up will provide us with the ammo to do more and yes the rents will catch up as prop value rises.
ahhh if only it were realistic
capital growth is not 10%, more like 7%.
high rental yield can be 15%, not 10%.
capital gains are a by-product of high yield. When yield is high, capital gains are inevitable. Just ask owners in Beenleigh & surrounding areas about their 70-100% capital gains this year. Capital growth is not a question of WHERE, but WHEN. Inner city always appreciates first, outer suburbs last.
high yield is NOT a by-product of capital growth, in fact yield FALLS with capital growth.
taxes, interest rates and inflation must be taken into account.
I did my own spreadsheet (including taxes, interest rates and inflation) and found the opposite was true, which I posted here a few weeks ago.
By diversification you can have both cash flow and capital growth in the one portfolio, but I’m preaching to the converted I’m sure.
My belief is it is a flawed stragegy to focus on cash flow alone.And visa versa. It may be worth stating that buying quality property is the best way to get capital growth rather than hoping regional areas are going to achieve significant capital growth it again or over the long term.I could be wrong?MJK
Crashy,
Whilst I agree its very much a case off “when” its just as much a case of “where” when it comes to property. Its also just as much a case of planning, diversification & foresight.
95% action 5% luck.MJK
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