Someone asked me the other day which of the two was better:
a. Buying a property which yielded a 5% rental return, and with a capital growth rate expectancy of approx. 7%
or…
b. Buying a property, at a much lower price, but at a much healthier rental return of 10% however with little (if any) capital growth expectancy.
I know which option I would prefer, how about you????
(and before anyone gets narky….there is no offense or malice intended. The question is raised as a mere point of interest, entering into the debate is by personal choice only. The author hereby accepts no responsibility for relationship break-ups, injuries or loss of any kind.) LOL
Jo
Jo,
It all depends on a number of things. I know you have mentioned that the price of the CF+ is less, but how much less? How expensive is the CG property? How many repairs (if any) would the CF+ property require?
I do know I like the less stamp duty costs of cheaper properties, plus the smaller interest. I wa recently about to purchase a growth property, but pulled out of it due to some caution I felt. Now I have a pre-approval for a decent amount but am seriously thinking of buying a few cheaper properties for the price of that more expensive property.
Sorry I can’t be definitive in my answer. If we are looking at a “sterotype” of neg/geared (CG) or CF+ (pozz growth) and the CG is say 400k and the CF+ is 50k, it is a hard call because neither would suit me. I am more in the middle- 150k-250, and properties with some unique qualities, is more suited to what I’m looking for. These props would have a neg yield of hopefully around 7% (or up or down a percentage point) and would have some possibilities for growth. So I’m afraid, as a postmodernist, I’m not good with narrow binaries
)hehe- I hope someone can answer you better than I have!
kay henry
You’re a wise woman Kay,
Caution is a good thing, and I am glad to hear that you pulled out before you got yourself into any situation that was not positive for you.
I guess what I am asking is …. would you rather spend 80K with a 10% return (minimal CG) or 160K with only a 5% return AND a 7% CG rate expectancy.
At the end of the day, it is a matter of choice. IMO there is no right, or wrong way….only different ways for different people.
Thank for your answer (direct or otherwise) I appreciate your participation, and respect your views.
Jo
There have been many debates about this.
Me – I prefer growth properties but I do get nervous about talk of interest rate rises.
So its a real treadeoff.
Originally posted by Monopoly:a. Buying a property which yielded a 5% rental return, and with a capital growth rate expectancy of approx. 7%
Hi Monopoly,
you probably guessed straight away what my honest answer would be, because im a negative gearer, and have not much interest in +ve cashflow properties, i wouldnt even bother with a 10% yeild, but also because over time, that +ve cashflow property and with is IRR, it would be profit at a blinded lost.
Cheers,
sisMy 22c worth.
It would depend on income (no use neg gearing on the pension!), and also your intention.
Is your intention to buy one expensive property that will be a prime development site in 20 years time? Or do you wish to be getting tenants, etc.
I saw this question of yours and immediately thought of ‘the answer’, which is ‘it depends’
One point I thought someone was going to raise was that with neg gearing you are effectively limited to a certain level of borrowing, but if you could get a number of 10% yield properties, you could effectively own as many as you want over a period of time.
Or mix’n’match with a bit of both
OK, i am going to throw in a few pros for +ve cashflow
Positive gearing is safer when gearing yourself to the eyeballs. In theory you can lose ya job at any time and still service loans (depending on vacancies).
Not so dependant on market conditions if you fix the interest rate. There could be no buyers about, interest rates can skyrocket, transfer taxes can change, and you still get your weekly $$$.
No sales needed to set up your retirement income. Whereas with neg. gearing you have to cash in ya paper profits (need a market peak to be most effective and govt. snatches ya cap. gains in tax)
Negative gearing has benefits too of course, like those potential huge cap gains!!!!
A balanced mix with a smart investing technique may be even better than just one or the other.
Just my view so far, rip it to shreds if you can guys……….constructive criticism welcome.
[cowboy2]
insults welcome too. he he he[jester]lifexperience
Hi guys
well on your senario Jo i’d go for the 5% plus 10% growth, mathematically you end up miles ahead in the long run.
HOWEVER
i feel that the question comes from a faulty view of buying cash positive properties, this is something that poor old Yack still can’t get his head around (we have had lots of good debates about this). When you buy cash positive why not buy cash positive that will appreciate in value. That is what i do and advise other to do also. i see this types of deals every day.
Here is another question what if the market dropped 10% which would you rather own a property worth 80k returning 10% or a property worth 160k returning 5%? See thats where the question is also faulty we just can’t predict what prices will do. No One was saying BUY in Elizabeth, Adelaide for capital growth, back in 1997 when i picked up properties for 21 – 24k. Even though these properties were returning 100pw (a 21% return), everyone said they will not appreciate in Value, i believed them. However last year i sold one for 93K. I use this example to show how cash positive doesn’t mean no capital growth. In fact my portfolio was appreciating by $1,000 per day last year and all the homes were cash positive. I don’t want to appear a show off but you can buy cash positive and get capital growth.regards westan
I find +ve cashflow deals in New Zealand which I sell to other investors. To be on my database send an e-mail to [email protected]
Being really basic here… LifeX, from what you were saying, it sounds like you feel neg gearing provides no income! If the point (for me) is to pay off my props over my lifetime (using, for example, rents, long service leave pay, supperannuation), then I will be earning rents too in my retirement- why sell? So if your 15 CF+ props give you (for example) 100 per week (using 2004 figures here) and my 5 neg props give me 300 a week … and this is in our retirement… then you are receiving $1500 a week in YOUR retirement, and i am receiving $1500 a week in MY retirement. Why do I have to sell to release money? I would be receiving the same rents as you. If you wanted to buy something in retirement, and needed some bigger cash, you’d have to sell an IP also.
I have a VERY different idea of neg gearing than some people do. It isn’t all about doom and gloom and gnawing and grinding of teeth in the Valley of Tears. Whilst you may get a higher *percentage* yield, it is likely that a neg geared property might also be achieving an equal (likely greater) dollar yield. Your 15 props = my 5 props. What could be simpler?
kay henry
If the gearing can be sustained, (b) is far and away the best option.
Negative gearing has it’s place
Cheers,
Aceyducey
My investment strategy is simple, capital growth comes first and foremost – otherwise I walk away.
In simplistic terms the reason why properties demonstrate capital growth, and others “at a much lower price” with no capital growth potential do not, is supply and demand.
[a] suggests there is demand for the property/location, which is likely to continue – suggests there is not.
Demand for a property/location equals “options” aside from passive income.
If there is a market downturn, both properties – if in close proximity [the same market] – are likely to be adversely effected. [a] at a lesser rate.
If the market appreciates and/or demand increases, the property offering higher capital growth will generally be the most lucrative.
This is a very simple analogy which would be subject to a number of considerations.
— Michael
Originally posted by westan:i feel that the question comes from a faulty view of buying cash positive properties.
When you buy cash positive why not buy cash positive that will appreciate in value. That is what i do and advise other to do also. i see this types of deals every day.
Here is another question what if the market dropped 10% which would you rather own a property worth 80k returning 10% or a property worth 160k returning 5%? See thats where the question is also faulty we just can’t predict what prices will do. In fact my portfolio was appreciating by $1,000 per day last year and all the homes were cash positive. I don’t want to appear a show off but you can buy cash positive and get capital growth.Westan,
You are an amazing individual, one with incredible insight obviously into the trends of the property market. I am obviously still a novice according to the size of my portfolio in comparison to yours. I can however (like you) boast of a healthy portfolio, a net worth of $1.5 million (debt-free) on properties that are continually growing at a rate of approx. 10% and NEVER in all my years, have I EVER seen the property market DROP. Instead, what I have seen, is a reduction is property prices which have occurred as a reflection of their “actual” worth and not that of the market’s inflated ego!!!! I, as many like-minded investors, have seen hundreds of properties being sold way beyond their worth because of ignorance and short-sightedness (i.e. driven by the desire to make a “quick buck”).
I resent your implication that my (or those who share the) view that positive gearing is “faulty”, quite the contrary!!!! I have never looked down at anyone who operates with option (b) and if they are successful, then that is great. In my view, there is no right, or wrong way, but my way…is a more cautious one, and if that is (in your opinion) foolish, so be it, but I am living a comfortable life, and can look to my retirement with confidence!!!!
I don’t have a crystal ball, and cannot PREDICT what the market will do, bearing in mind, that it is made up of “people” and as such, are fickle and erradic in their patterns of behaviour. Yet, the property and other markets have CYCLES, which indeed have an element of predictablility. These cycles may vary in length, however, they are generally predictable in nature.
To answer your question, I would prefer a property worth 160K returning 5% instead of the 80K returning 10%…..why, because money is good while you have it, but with only a small level of growth, it is only a TEMPORARY fix. I plan to live longer than the positive cashflow return can guarantee…LOL I have NEVER indicated that I thought it impossible for positive geared properties to appreciate in value, I am fully aware that this is certainly achievable depending on location, condition etc.
Now, that you have all, read my “faulty” view and lengthy essay, I gladly welcome your criticism (as a learning tool in my development) and am not concerned with any insult which may accompany same. In other words, hit me with your best shot!!!!
Jo
Hi Monopoly
First of all i want to say my comments were not ment to be a personal attack on you.
What i see as the “faulty” view of cash positive investing is that it is done at the expense of capital growth. I feel that this is wrong. We should buy cash positive that will appreciate in value. Yes it can be done if you invest carefully, thoughtfully, after reasearch etc. I believe it is just as wrong to assume that cash positive means no or low capital growth as It is equaly wrong to say it is negatively geared therefore it will appreciate.
I see the two concepts not linked to each other, capital growth and cash positive can be achieve together. I used an example to show that in my previous entry. Sorry Kay henry , i know you don’t like old examples but obviously i can’t show what my purchasers today will be worth in the future, however i believe all my purchases in the past 6 months will be worth more in 12 months time.
Long time member to this forum know that i buy cash positive in areas that are about to experience so major boast to there local economy, examples include centers of 5000 people that already have no vacant homes and will be opening a new industry that will create 300 jobs, in my opinion this is a good possibility for capital growth. i hope that explains where i’m coming from.
Jo i certainly wouldn’t see you as a novice investor.
sorry jo, but you made this comment
“NEVER in all my years, have I EVER seen the property market DROP. Instead, what I have seen, is a reduction is property prices which have occurred as a reflection of their “actual” worth and not that of the market’s inflated ego!!!!”
well isn’t that a price drop? when ever the market goes down it is a price drop. Melbourne prices reduced or dropped in the early 90’s but not by very much maybe 5% on average.
so Monopoly to sum up i was more commenting on the idea that cash positive is done with out capital appreciation, as i commented earlier given the example you quoted i would in that example take the property that will show the capital growth, as in ten years it would have doubled in value and you would be ahead by miles over a property that hadn’t gone up.regards westan
I find +ve cashflow deals in New Zealand which I sell to other investors. To be on my database send an e-mail to [email protected]
Hi Westan,
Glad to see you held up okay against my outrage…I didn’t mean to lash out at you the way I did, but I do get quite agitated over “one-eyed” views, and I assumed that that was what you were doing.
As I said when I sent you the PM, I do admire what you have achieved; I don’t necessarily agree with every aspect of how you have done business, nor would I expect you to agree with my way either.
As for being a novice, true I have had lots of experience, but there are so many (even in here) that IMO, I believe would make me look like an infant, yourself included.
Yes, you’re right, even prices returning to their actual worth is definitely a drop. I stand corrected. Although, I do agree with you, that as Melb did back in 1990, these drops may only be significant.
Again, thanks for your comments…..and as I said, in my PM, I did not take it personally; I felt you were attacking anyone who supports the neg gearing way of investing.
Regards,
Jo
It’s nice to see everyone opening their eyes to techniques different to their own.
Kay, you make some good points. but you said:
my 5 neg props give me 300 a weekif, after paying off your 5 props you are making $300 a week cash. That then becomes a positive cashflow scenario. So I think we are agreeing pos. cashflow may be better once you want to retire.
However if you were highly geared,( which i believe gives more leverage to make potentially more $$), in neg props, you would have to cash in some ips to get a pos cash situation.
You also mentioned:
Whilst you may get a higher *percentage* yield, it is likely that a neg geared property might also be achieving an equal (likely greater) dollar yield. Your 15 props = my 5 props. What could be simpler?Good point, however i am suggesting The 15 props via a pos cash technique would be acquired quicker using compounding of the extra cash and safer at higher gearing level. Much quicker and easier!
There is only two ways i can see to turn a neg geared prop to positive cashflow, work ya ass off to reduce loan amount, or sell some to realise the equity you mention.
How does your plan get around this?
cheers[cowboy2]
lifexperience
Lifex
)To answer a couple of your Q’s, firstly, you said:
“if, after paying off your 5 props you are making $300 a week cash. That then becomes a positive cashflow scenario. So I think we are agreeing pos. cashflow may be better once you want to retire.”
Lifex, this is what I have always seen property to be about- money for retirement, and perhaps enough money to one day own my own home. It has always been my aim to pay off properties. I won;t see them, when paid off, as “pozz geared”. I only use that term about purchse price and rental yield. So my properties will never be pozz geared, in my mind, because the purchase prices were too high for 10.4% rental yield. However, it is *possible* that my rents will increase over 30 years (retirement age) so they may well become pozz geared- who knows?
You also asked me about my plan to pay the props off. Well, as I said- wages, rents, tax returns, possibly long service leave payments, and definitely, superannuation paid on retirement. I also intend on buying more IP’s and still trying to manage my LVR, so that I am not stuck. It’s not a magical strategy, LifeX- and I haven’t really thought it out- I guess it will just occur organically
kay henry
Hi kay henry,
Do you do interest only or P&I on a – geared property?
Thanks
RoboHi Guys,
comes down to which is better – CF yield or CG?
all other things being equal, a dollar now is better than a dollar in the future.
That’s been proven.
So a property with 10 percent yield and 0 growth is better than a 0 percent yield (i.e. own home, vacant land etc) and 10 percent growth on paper.
(all other things being equal such as holding costs.) On Paper.In favour of 10 percent yield – you get your money now out of the property and can more quickly get it into the next property. Not so much financial risk (i,e, serviceability)
In favour of CG – your ten grand you made in the first year is locked in to the house. And then you have a 110k house. You are therefore far more likely to get the most out of the compounding thing the following years with CG because it’s much harder for you to get the money out and spend it!
The CF +ve person has also more flexibility as to what to do with their profits. Lifestyle? pay down loan? fund deposits or renovations? buy shares?
whereas the neg geared person doesn’t have any choice, their ‘profit’ is locked into the house unless they get it out by selling or refinancing.
thus further increasing their risk, (unless they saw the light and bought a few +ve CF props to balance things out.)Neg geared property, which loses money each week, has more risk that something happens and you can’t afford to pay in to your property any more, have to sell, get hit with CG tax which eats into your ten percent anyway. Then stamp duty to get back in to a different property at the same point in the market.
CF+ve means (even with no growth) you probably wouldn’t want to sell (you are making money!) and if you fall on hard times are less likely to have to sell (property supports itself) – so therefore the risk is less.And are more likely to be able to buy the next property quicker.
I can totally agree with westan. ‘the world’ told me I wouldn’t get any CG on my 20 percent yielding properties which I bought a year ago,but I did, 60 percent growth in one year. That’s 80 percent ROI in a year, not bad eh. I don’t believe i was lucky, I believe I was buying in undervalued areas.
Well then again there seem to be people such as SIS who seem to hate profits, but i am not one of them. At least i think that’s what he means when he says (sic) “that +ve cashflow property and with is IRR, it would be profit at a blinded lost.”
(- say what?)Oh yeah and the other thing to compare is that you get two properties for 80k for your one property for 160K so you also have to compare the benefits there…. risk mitigation (2 lots of rents, so it’s more spread. 2 titles, so spread there too
and drawbacks (2 lots of property managers, 2 lots of maintenance)
Also rents tend to rise over the years. an actual figure from a Tokoroa property: 1991 purchased for 5K rented $20 per week value 2003 50K rented $130 per week
do the math as to how much ‘yield’ you are making by the 13th year even with NO capital gains.and as you can see the property also ten timesed in value (CG) in 13 years.
If you’d bought that kind of property you probably could have owned 75 of them in ten years. I know this because I know someone that did. If you’d bought neg geared props it would depend on your income as to when you could afford to buy more.
cheers-
MiniNZ Bird Dogs. SOLD OUT! More deals coming…
hi Michael R,
“and others “at a much lower price” with no capital growth potential”
I do not believe there is such a thing as no capital growth potential. The world has an increasing population.
As far as where I invest, for the time being, NZ, – there is so much demand from people wanting to move to NZ that the NZ government has deliberately slowed immigration to cut down the number of people who are allowed to enter NZ – to try and slow down the housing market!!!
So I just can’t see that there’s anywhere habitable on God’s green earth that isn’t going to have more demand placed on it in the future than now, during our lifetime – all other things being equal
re: supply and demand,
there will always be ‘favourite locations’ such as beachfront, and when they rise in price, people will buy a few blocks back. And then in the next suburb, and then in the new subdivision on the outskirts of town, and then 15k out of town, and so on. ripple effect.
I just can NOT see that there is such a thing as ‘no capital growth potential’.
other than perhaps brand new apartments in the first 5 years? they’re overcapitalised from the get-go and it’s all downhill from there! bugger all land value to make the property hold it’s value, and ever increasing strata fees.
hmm, apartments….i see it a bit like what happens to the value of a brand new car when you drive it off the lot.
NZ Bird Dogs. SOLD OUT! More deals coming…
“I do not believe there is such a thing as no capital growth potential. The world has an increasing population.”
— Agree. Time dictates capital growth – the key is selecting a location which clearly demonstrates growth during your desired holding period.
“the NZ government has deliberately slowed immigration to cut down the number of people who are allowed to enter NZ – to try and slow down the housing market!!!”
— Not correct. From a foreign investment perspective, New Zealand remains one of the easiest countries to acquire and own property – especially for the smaller investor.
There is an attempt to slow down immigration for political reasons unrealted to the real estate market.
“brand new apartments.. they’re overcapitalised from the get-go”
— Demand dictates if an apartment, or any property, is purchased for more than its market valuation – supply and demand dictates the market.
It is not often the apartment is overvalued at time of purchase, it’s the purchasers inability to foresee oversupply, market corrections, avoid buying on emotion – and service payments – which can result in short-term losses.
“bugger all land value to make the property hold it’s value, and ever increasing strata fees.”
— “Land value” does not necessarily dictate “market value” like it once did.
As you have highlighted, “the world has an increasing population”. This factor combined with “convenience” and “low maintenance” has resulted in a significant increase in demand for apartment living worldwide – which can only continue.
Land will always play into the equation, but in many metropolitan locations land is simply unobtainable. Apartments satisfy supply [limited land] and demand [convenient “waterfront, central, high-rise” living] at an often affordable cost.
As for “strata fees” these are nothing more than a minimal expense for maintaining the property.
Those who question strata fees do not consider the even higher cost of maintaining a SFH, for example.
I am not defending apartments – in fact I am generally appalled by the low standard “shoe boxes” that are commonly constructed in an attempt to maximize profit – in Auckland, Sydney and Melbourne, for example.
Demand for apartments is only going to continue, therefore I would not consider this segment a bad investment across the board [short-term or otherwise]. The key is doing your homework to ensure supply will not adversely effect the investment, and demand will continue.
— Michael
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