Hi all,
just wondering,would you prefer a property with 5%capital growth and 10%yield,or a property of the same initial value with 10%capital growth and 5% yield? Would love to hear other’s opinions,and why.
Tools
Hi Tools
everyone knows that i’m a fan of cash positive (i’ve never bought a negative geared on)properties so it may supprise some with my answer.
I’d take the 10% capital growth and 5% return. The reasons are a simple matter of mathematics. Over any period the returns will be better with the capital growth being higher. The reason being that a 10% yeild doesn’t not make a 10% return, we need to deduct rates, insurance etc. Even with the leverage of an 80% loan, when its all worked out the return is short of 10%.
So i’d go for the 10% capital appreciation (not to forget that 50% capital gains is free money- not taxable).
It would be wonderful if we knew what the capital growth would be, sadly none of us are that clever.
In reality i don’t think we have to make the choice between capital gains versus yeild, find properties where you can expect growth also.Regards westan
I live in New Zealand and for a fee find cash positive deals there, email me at [email protected] to join our database
The later – capital gains receive more favourable tax treatment, plus the benefit of the compounding value of the asset (unless you are dedicated enough to reinvest all your income, in which case what would you invest in and why bother – why not just pick the other in the first place?). However if I was starving and looking for my next dollar, or if I was terminally ill and only had 5 years to live, I may prefer to take my income in the form of high rent yield. Conclusion – depends on your personal circumstances. It also depends if the 10% capital growth has been garuanteed and by who… which wouldn’t happen in reality. Not that rent yield is garuanteed either!
Extensive list of ‘Off The Plan’ property available for sale in Perth.John – 0419 198 856
hey Westan – you just snuck that reply in before me! glad to see we pretty much concur.
Extensive list of ‘Off The Plan’ property available for sale in Perth.John – 0419 198 856
Assuming your rental grows by 3% per annum and assuming expenses at 8.5% total per annum.
You get the following over 10 years
10% growth 5% yield
Cash flow: – $55,361
Capital Growth: $318,748
Net Gain: $263,3875% growth 10% yield
Negative cash flow: $59,277
Capital Growth: $125,778
Net Gain: $185,056Note if you are in the top tax bracket the -$55,361 in the 10% growth model could be cut in half, and if you get deprecation it could be wiped out all together. If you actually “knew†you would get one or the other the 10% growth model is far superior.
The other thing to keep in mind though is with the 10% cash flow and 5% growth you could actual own an unlimited number of properties, with no serviceability issues, this could far outweigh the growth model if you take advantage and own a much larger number of properties.
Slum Lord
You must be logged in to reply to this topic. If you don't have an account, you can register here.
