Multi -asset Investing modelling - 15 yr plan

For people even with @Propiedad 's income, assuming it is continuous till age 55, for both of you, generating $300k net per year in today's money is considered quite an achievement via residential property. Of course some PCers can do better.

 

"Capital Growth - Residential 6% ; Commercial 2% ; Stock/ETF - 10%"

@Beano @Scott No Mates - Would you agree with the CG assumption of 2% for commercial property. Lets say you invest in an Industrial warehouse close to Port of Brisbane or Medical Centre next to a Hospital or Child Care Centre in a good suburb - isn't 2% pa over 15 years very conservative estimate? I would expect around 4% over 15 years period.

 

For the past periods I can quantify capital (from comparative sales) and rental growth (by actual new leasing) of my commercial property that I personally own.
But anything in the future even for my own property I would struggle to forecast even one year.
Your guess probably has the same probability of being right as anyone else's guess.

ps slightly off the topic but infrequently traded properties you can only rely on actual sales.
pps I really only "bank" on income . Capital gains I seldom even look at.


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what was past Net Yield of your property (range) after paying all expense, outgoing and mortgages? unless one afford to buy property free hold i see it difficult to get net yield better then what a stock market can provide on any type of property?

 

That's not a like for like comparison though. Net yield in the form of distribution of some shares (REITs) would be similar to comm property ownership since it's the same type of asset behind it, other dividend focused shares/LICs with franking credits would be similar too in cash outcomes, but if you're assessing total returns i.e. capital growth and distributions of stock market returns then you have to count both the net yield and the capital growth of a commercial property. And in that case who knows about the future but in the past 20y the growth in (quality) commercial property has been tremendous in addition to the rental income growth as well.

That's not even touching on the fact that you would be getting leveraged returns in one instance, and non leveraged in the other (or unlikely to be / limited leverage).

 

1: Mortgages are not taken into account when calculating net yields.
2: Finance cost are very specific to the borrower.
3: Net yields: When comparing shares vs property you do need to take into account risk of the investment and the risk of the financing. Buying shares via options and margins vs encumbered property carry differences in risk. This risk needs to factored into the return. I for one would be happy to buy/own a property greater than all my net assets but not shares.
4: The timeline of the investment also needs to be taken into account . Until the property is sold the capital return portion cannot be calculated.
5:When you referred to "freehold" do you mean freehold or unecumbered ?
6o you mean the net yield today based on the original purchase price ?
7: With regards to net rental many of my industrials after 24 years are now returning more than 40% of the original cost each year.

 

We are coming of 20 odd years of growth (prior to C-19), this is a big stimulus to rising rents & capital values. Where we go from here is unpredictable however Oz went into C-19 with a strong economy (although it was faltering), pumped in shedloads of $$ & staved off a full blown recession.

Post-Covid we'll still have a strong economy, record housing/construction but massive debt too - uncharted waters.

 

Well you and @Kriv raised valid points and I agree that capital gain in individual stock is not guaranteed at all while in property (commercial/residential) capital gain seems to be guaranteed if you hold longtime and growth rate would depend upon where you have property (location, town, city etc.) so in sydney might be 10% and may 2% in regional areas but one can expect capital gain in property. the same capital gain is true if you invest in ETF similar to VAS, VTS, VGS type of index tracking broad ETF if you are holding long... IMO.

I do agree that leverage can work best in property as you probably can use equity in your existing investment to keep buying next one but one day you need to start paying as well.

However, my dilemma is this. If I had $150k to invest then I can put into VAS/VTS/VGS and get guaranteed dividend (unlikely not to get any unless the world comes to end) and pay no strata, council rates, water, sinking fund, mortgage fees, agent fees (rental management & selling fees) etc. so basically i get net cash without any headaches as long as i don't check my portfolio on yahoo finance everyday .

If I think to invest the same amount of money to purchase property (comm. or residential) to buy a unit/villa in Perth which pays $350 rent/week then my net in hand payment after all expense will be way lower than investment in ETF.

see below, table on my assumption and calculations. I have not consider capital gain in this calculation as exercise is to understand my net return on investment today. for simplicity i have not added depreciation as it will be low for old property and to offset that franking credit is also not considered in etf return.

 

But my question remains - Is 2% CG assumption for commercial right? I would have thought an industrial warehouse within 15km from Brisbane will give 4%-5% over 15 years horizon

 

Leverage in property makes a BIG difference in net CG after 15 years. See OP excel.

 

It feels to me like you’re removing very relevant elements of the equation to try and reach a conclusion you’ve already drawn? And limping commercial with resi meaning all your assumptions may be correct for a villa in Perth, but way way off for say a warehouse in Brisbane.

I can understand removing depreciation for resi property but I can’t for commercial. Those benefits are enormous and tax advantage in property is a significant aspect of the investment value. Similarly I think it throws the comparison completely off if you remove capital gains for CIP. Same with leverage, it means your cash on cash return is much higher.

I have never really understood the ‘headache’ argument. I have resi and CIP investments and I have no issues leaving the rental management to professionals. Maybe I’m lucky, maybe it’s just a matter of buying the right asset.

if you truly do a like for like I think commercial would finish on top. However the big factor against it is not going to appear on a spreadsheet: it’s about concentration risk (no diversification) and higher risk of the investment as it’s a single asset and tied to the economy. Higher risk higher reward.

 

The exercise is not what capital gain ETF/Property can provide it is about what return you get in your hand year on year from the date you invest.

Depreciation of property can be added in to the equation but then franking credit of 30% also needs to be added in which most probably nullify the effect of depreciation.

Your reason for lack of diversification in ETF is not entirely true as ETF provides way better diversification then any type of property you may have in one country as the underlying asset in ETF always provides you diversification in various sector as well as various country.

I owned investment property in past but never a commercial one so spreadsheet is attached would like to know others' view on how commercial/residential property makes any or better then ETF.

 

Wait, what?

I am saying indeed that the issue with property is lack of diversification on a single asset, versus ETF.

I think you're set on it being a closed either/or debate. My view is in reality a good portfolio needs both, and more important needs a strategy behind it.

 

ETF provides diversification including to property and many other business and across world so amount of diversification you get is much better then property or buy a stock in itself.

I am not closed to anything but excel is created to understand if property is better or not. i would like to see number on spreadsheet then emotional discussion/debate.... !

my hypothetical scenario doesn't say property is better at all but i am open to learn if it is better in commercial or any other type but based on numbers in spreadsheet.

On separate note, I must say that property development do provide better return if in right market location & time then stock or eft but that requires different skill set, experience and upfront capital to achieve.

 

I'm saying the same thing as you regarding ETFs and diversification.

If you want numbers on a spreadsheet to tell you an answer, then you have to input the right numbers, not a partial view.

To start with you have to do total returns for the assets, yield and capital growth. And you can't lump in one bucket for 'shares' and one bucket for 'residential and commercial property of all prices and sizes'. Do you really think the type of return you get with leverage are the same on a 350k suburban Perth house, a $1.5m premium inner city house and a $2m commercial warehouse? And similarly for dividend focused LICs and growth focused ETFs? And that's not even touching on the tax advantages which will skew the numbers further.

 

I think OP excel is saying net return after 15 years is highest in residential due to higher CG and leverage in residential. Are you saying CG is commercial is higher ?

I think OP is trying to estimate net return after 15 years not money in your hand year on year.

 

It's near impossible to work out how property will perform in the next 15years .
It could be anything!

 

There seems some misunderstanding as I may be not clear.

First of all I am not comparing residential vs ETF. I would like to see comparison between property vs ETF. Here, property could be residential or commercial, you can choose based on what you believe can provide better return.

2nd. We don't need to consider capital gain at all as it could be anything in future so that is not the intent of the spreadsheet. What I would like to learn as to how much yield/return we get in term of dividend or rental return by investing in ETF vs Property after deducting all expenses.

3rd. I used residential data in the property based on what I had before but the intent is that I would love to see how commercial return works if you populate data in property section for commercial property and certainly you can only use data for property that you can purchase if you had $150k cash in hand so obviously we can't use $2m warehouse but you might can use $700k warehouse depending upon what your experience is on ability to lend from bank of you had 150k in hand.

If I had any experience in commercial property then I would have used that data.

I am not trying to get 15 year return what I am trying to do is if I had 150k now then where I can invest that to get better or higher net return after deducting all expenses from dividend or rents.

I am purely talking about index tracking passive ETF particularly similar to Vanguard. So LIC or individual stock is not to be considered for this exercise.

 

Not higher but some of the underlying land appreciation is the same. And interest rates coming down have led to price growth just like in resi. There’s a long term trend towards yield compression so today someone would buy an asset on a 4% cap rate that the previous owner would have bought at 6% a few years ago and someone else at 10% a decade ago (@Beano would know). Meaning that unlike what is commonly thought of with commercial property, you’re not really forgoing all capital gains for the benefit of vastly increased net rental income. You can still get some of both.

I’m sorry but you have a fundamental misunderstanding of the assets you’re investing in both with shares and property.

An index tracking ETF is not a government issued bond. You don’t have any dividend guarantees, no more than you have guarantees of capital appreciation of the land you purchase in a property. What you have is part ownership of all companies within a certain index, and these companies, whether because they are currently profitable or are expected to grow can give you a return in the form of a dividend, or the ETF gives you a distribution because of purchase and sales, or the value of the share appreciates because of their future growth potential. The closest you have in your description of ‘buy shares and get a guaranteed yield from them’ is REITs and dividend focused LICs but even then it’s no true guarantee.

So when you are trying to compare money in your pocket at the end of the year it’s a pretty useless exercise unless you are right at retirement age, hold no other assets or loans and happen to have 150k cash (and even then I would argue it’s way too simplistic a view).

It would be madness if the OP with their income levels and investment goals were to ignore total returns of assets (including capital growth), tax advantages (50c for every dollar of tax deduction at their levels of income) and the power of leverage (huge possibilities for servicing loans).

Btw if you do want to populate your spreadsheet with commercial property data you can find fb groups with that sort of info on recent purchases (can’t link them here as it’s against site policy).

 

The problem is that is the past and that particular property is no longer available .
Today's deals are not the same as yesterday deals .
I can tell you seventy deals but it will all be historical. Interesting to read about but means little for the future CG.
Income , mostly long leases I can tell with some certainly but reviews anyone's guess.