Which would you rather????

Hi Guys,

thought i’d show you guys quickly why i voted for the property for 160K with only a 5% return AND a 7% CG rate expectancy.

simply based on the information…

Property @ $160 @ 5% rental = $153.84 a week in rental 0r $8000 an annum

based on an interest only rate of 6% and overhead weekly expenses of $60 per week or $3120 per annum

Total Cost $11,120 per the annum

but at a capital growth of 7% annual and compounding each year..

this is how the property would look like after 5 years.

1st year $171,200 an increase of $11,200
2nd year $183,184 an increase of $23,184
3rd year $196,006 an increase of $36,006
4th year $209,727 an increase of $49,727
5th year $224,408 an increase of $64,408

so you may have made a lost of $11,120 roughly each year, if all expenses and interest rates stay the same, but lets say if your able to claim a minimal 30% tax rebate on this of $3336 a year or so, this property has virtually looked after it self as its neutral geared, same follows each year, but after the 5 years, still this property has virtually cost you nothing, but being conservative on a 7% growth annually, you have actually made a whooping $64,408 and had to do absolutely nothing.

Feeling that the figures are too conservative and on relevant information on hand, that most of all know…

… property doubles in price on average every 7 years…

either way, you made $64,408 or could have doubled your returned and made a whooping $160,000 more and being even more conservative, if we were able to increase rentals every 6 months by $10, by year 4 this property would be cashflow positive (based on 11 second solution) that the loan could then rollover from interest only to principal and interest, in perfect timing and manner.

… not only has this property, given you plenty of tax incentives, rebates, and taxes breaks, it even looks after it self and provides you with +ve cashflow and guaranteed capital growth each year.

… with the cashflow positive property at spend 80K with a 10% return (minimal CG)

maybe no capital gain, very hard to increase rentals at the same demand as the negative geared one, and as such maybe a passive income of $50 a week… and very small tax rebate

… i honestly dont see you building up your wealth to quick and having large access to immediate equity and funds as such as the negative geared property…

… anyway, everybody has there own way of working out what is the best wealth creation plan for them, but just playing with that very basic IRR, you can see now, why a +ve cashflow property with no capital growth is a profit at a blinded loss.

Cheers,
sis.

People 4get that by saving just $3 a day & investing it sensibly
over a working life, you’ll end up with around $1 million

SiS, I am fairly new to this so please bear with me if my questions seem very basic.

You made an assumption of 7% annual growth compounding, that is an average over time but it’s a fair bet to assume that 7% growth per year over the next 2-4 years is optimistic. Factor it a 7% annual growth averaged out over the last 10 years and I think you’ll find growth could just as easily be flat as opposed to increasing. Or am I missing something ?

You’ve also made an assumption interest rates remain the same. Surely that’s being overly optimistic considering the current economy and the banks increasin long term rates.

You stated you can raise the 160K properties rent by $10 every year, but you say you can’t do that to the 80k property. Why not ?

You’ve also assumed that the 80k property will not raise 7% per annum yet you use this figure for the 160k. Why wouldn’t they be the same ?

It seems to me your assumptions are geared to make the CF- property look a lot better. Using the same calculations and assumptions, but swapping the growth and rental increase from the 160k to the 80k, the cheaper house makes more sense.

Once again, I am just trying to better understand the calculations and why the assumptions were made. It will help me to better understand why people feel that CF- properties are a better investment than cf+.

Baloo,

As an example if you look at about page 102 in Steve McK’s book you’ll see that over the last twenty or so years 7% average property growth or higher is perfectly feasible.

Now naturally that IS the past and things may change…however in the period considered in the book there have been years where prices have stagnated – and even gone backwards.

Generally assuming a growing population, economic stability (within the normal boom/bust cycle) and no major shifts in culture, populations or housing technology, I believe you can take these figures as a useful indication of what is reasonable to expect in the future.

There are claims that 7% average growth has been recorded since 1066 (referring to the Domesday Book in the UK as the first comnprehensive audit of British wealth) – however I’ve never been able to find source docs to verify this

A few authors put the figure (but not the backing evidence) in their books however.

Cheers,

Aceyducey

Hi Guys

of course the lower returning home with the capital growth is better, thats obvious no arguement, what i’m saying is the question is faulty,
It’s like me saying which is better a cash positive property making 10% return and 7% capital growth or a negative geared property making 5% capital growth, obviously the first property will be the better home to invest in. The homes i think you should be buying are cash positive and have capital growth, you don’t have to have growth or cash flow, you can have both.. Having said that i’d much rather a cash pos. home with growth than one without cash flow
wouldn’t you agree ???

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]

“the question is faulty”.. “you don’t have to have growth or cash flow, you can have both”

— The question assumes property will not generate capital growth over the desired holding period.

It is true that all property will appreciate in value over time, but there are locations where this cycle stagnates or is reversed for a period of time, due to economic or other reasons.

I am sure no-one will argue that a negative geared property generating 5% CG is a better investment than one offering 10% return and 7% CG.

Although, it is not often you will find a positive geared property outperforming a negative geared in terms of capital growth – this should be a red flag.

My preference for negative geared property is based on a short-term holding period [at times no more than a few hours, other times a year or more] and high capital growth rate.

“Demand” is the driving factor behind these transactions. “Due diligence” and understanding the market is the key to success.

My point being, if there is too much focus on positive cash flow and holding long-term, often the most lucrative investments are being overlooked – as is the ability to create true wealth – real estate investment is all about “leverage”.

[“calculated”] Risk = Reward

— Michael

Monopoly, I can’t believe you can ask such an obviously offensive and insensitive question.
Watch yourself GIRL !!

Hello Westan

RE: “What we have been seeing at the cheaper end of the market is it is rising at about the same rate as the middle of the market so if a home for 100k rises 20k we are seeing the cheaper end say 70k move 20k also. so as a % return it actually outperforms the higher priced property”

— I certainly agree, although I do not deal in SFH’s this is a trend we have also identified in New Zealand at this time, in terms of land values.

You are correct, one should not focus on buying the more expensive property – from an investment perspective – instead purchase the property which demonstrates the highest capital growth over a defined period.

RE: “it is actually quite common to find high yeilding properties that outperform the so called capital growth areas…

this is posible because a lot of smaller areas are/have been undervalued for a long time and overlooked”

— The yield is generally a reflection of the location combined with the properties net worth. I do not doubt that in some “overlooked” markets the yield is outperforming CG.

But my point was, it is not often a positive geared property will outperform a negative geared – if the buyer has done his/her homework.

Generally a negative geared property is reliant upon capital growth in order to demonstrate a ROR. This rate should clearly outperform potential yields + CG [+ve geared property], or it may not be a good investment.

— Michael

if…in the end, you reach your goal, does the path really matter?????[buz2]

pete