The property couch - growth vs yield properties

Discussion in 'Investment Strategy' started by Anthony Brew, 21st Jun, 2017.

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  1. Anthony Brew

    Anthony Brew Well-Known Member

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    In one of their podcasts a while back, they had a question from someone asking whether to get a "growth" property or a "yield" property. The answer given was that if you can afford it, always go for a blue chip growth property because due to it's more in-demand location, not only will the value rise faster, but rent will catch up later on due to demand of people wanting to live there, so you actually get both growth and income, so go for yield properties generally if you can not afford the blue chips.

    In another video, one of them was going through a typical analysis showing off their software and how it takes into account an vast amount of detail and showed an example person and how they mapped out a plan to accumulate 4 properties over the next 20-30 years until retirement and showing the growth and income as it changes over time.

    One thing that stuck out from this was that after the initial couple of property purchases relatively close together (I think after 2-3 years), he said they would often take a bit more time before purchasing again (cant remember why), but then said that after that they would be looking to get a couple of properties to help with the cash flow.

    I am wondering if anyone can give an example of a sold property, or even suburb with some sort of specs for me to look up, that would constitute one of these?
    I assume he does not mean way out in the sticks where it has high yield and zero growth, but rather a lower growth (but still growth), but higher yield than current market average?

    Would this maybe be somewhere like Logan? Someone in the Logan thread put a granny flat on and the total yield after that was 7.5% when taking into account both purchase and building costs, so this actually sounds appealing. But I don't know what the 15-20 year growth forecast estimates might be for that location. Plus if holding costs are 25% of gross yield, the net yield is back down to 5.6%, which is ok provided it has some growth above inflation.

    Or could someone give an example of one of these types of properties that has higher than average yield yet would still have some scope for growth?
     
  2. D.T.

    D.T. Specialist Property Manager Business Member

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    I don't believe in it.

    A good yield property can have great growth and a bad yield property can have no growth. Growth and yield are not mutually exclusive attributes.

    In saying that, equity is king as this is what is used to buy subsequent properties. Equity might come from growth, or it might come from cosmetic / structural renovations too.

    Given lending is the restriction to most people, you're better off finding the best equity prospect you can within your budget.

    And if lending isn't your limiting factor, monthly cashflow soon will be. No point hanging out for 50k growth at a rate of -10k cash a year.
     
    Last edited: 21st Jun, 2017
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  3. Anthony Brew

    Anthony Brew Well-Known Member

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    I don't understand this line. Would you mind saying that in different way?
     
  4. D.T.

    D.T. Specialist Property Manager Business Member

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    In that line you quoted, swap the word 'doubt' with 'point', i think my phone auto corrrected that badly :p

    Basically meant that people are happy when their properties have gone up, but they've paid for it in the prior years in negative cashflow. The numbers used were just to make a point, not anyone's actuals.
     
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  5. RetireRich101

    RetireRich101 Well-Known Member

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    hope this post doesn't end up with CG vs CF blood bath discussion.

    CG with a crystal ball projection of 15-20 years... I don't have.

    if I buy a house today, I know how much I get rent today, so I know my CF and yield position again today.

    as for Logan, how do one know it doesn't perform better or inline with wider Brisbane growth. I remember I had compared some Logan suburb with few 'inner' Brisbane suburb for the past 15-20 years, and Logan kicked ass..
     
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  6. Anthony Brew

    Anthony Brew Well-Known Member

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    Ahh got it. Yeah good point.
    Cheers.
     
  7. Anthony Brew

    Anthony Brew Well-Known Member

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    Yeah I am hoping it does not come to a growth vs yield thread either.

    I guess I am more wondering that since not all high yield properties are considered investment quality (eg way out in the sticks), then can I get some sort of example of a relatively high yield property or location that would be considered investment grade (ie will still likely have some reasonable chance of growth along with it)
     
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  8. RetireRich101

    RetireRich101 Well-Known Member

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    the 7.5% yield you refer to in Logan I am well aware. it's not for the average Joe though. it's a corner lot with an existing house on it. then a new dual income property was built on the vacant land, so it is generating 3 separate rental. Is it legal you may ask... the answer is yes for that property. however not all Logan property you can do this and you need to know your development and zoning.. it was cleverly done i must admit.
    other's achieving 6.5%+ in Logan are straight purchase that's already a dual income property. it's for a big family under 1 lease arrangement. for separate lease not so legal. these property get snapped up pretty quick.
    Most Logan suburbs are 30km from CBD. if the lower SES doesn't tickle your fancy you can opt for other better suburbs
     
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  9. Sackie

    Sackie Well-Known Member

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    It really all comes down to a person's goals and financial position. If someone had 1 mil equity with great serviceability and goal was to do a development, then they generally wouldn't purchase an IP with 7% yield for a long term B & H.

    Similarly if someone had good serviceability with a good deposit and they could afford a home say 8km from the Brisbane CBD which would be $50/week NG or a CF+ property 20km from the CBD CF'ing $30 a week, I know which one I would be advising them to buy for their financial position. Ultimately equity is the name of the game. Lets be blunt, if you want to be wealthy and rich - you need as much equity as possible. CF is also important because it helps you balance the equation so you are not too negative relative to your overall financial position. But its equity you need to build. Sure you can have both, CF and CG, but you need to choose really well with some luck.

    Now on the other hand, a single mother who is on 75k with 1 kid is not going to be able to build a portfolio with too much NG going on. There needs to be a different approach. Most likely needs CF or neutral properties in areas set or primed with great CG potential and then wait. Then slowly build 1,2,3 etc as the equity grows. Her CF and serviceability wont be affected much because her overall portfolio should be neutral.

    Really the whole CG and CF debate is redundant imo. There is no debate. Different situations/goals/financial positions will require a mix of both CG/CF and their weighting/timing will vary again according to where they are at in the portfolio journey.

    The real, useful answer to this is never quick and easy that you can just get by reading a post or two.

    Just my opinion.
     
    Last edited: 23rd Jun, 2017
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  10. Lacrim

    Lacrim Well-Known Member

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    Horses for courses but for example, if I was buying in Brisbane (and if I can afford the cashflow drain)...

    Option A - house in Logan, say, Kingston, for $280K with $320pw rent or
    Option B - house in Grange for say, $680K with rent of $500 pw

    I'd pick Grange.
     
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  11. Sackie

    Sackie Well-Known Member

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    Yes so you are banking on the CG being better in the Grange property, closer proximity to the CBD which is an important factor for Brisbane, and your doing what fits your financial position, risk tolerance and goals, even though you are accepting a negative CF position on this deal. Makes sense to me.
     
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  12. Lacrim

    Lacrim Well-Known Member

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    It's actually really simple. For the noobs:

    Higher value, lower yield = more desirable suburb
    Lower value, higher yield = less desirable suburb

    One has to make a call as to which end of that spectrum fits in better with their strategy, and financial means.

    The reason I accept the - cashflow proposition is because I believe the likelihood of rent increasing in Grange to ease the - cashflow pain is higher than the likelihood of Kingston being a desirable suburb.
     
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  13. RetireRich101

    RetireRich101 Well-Known Member

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    how about?

    Option A - house in Logan, say, Kingston, for $280K with $320pw rent or
    Option B - house in Grange for say, $680K with rent of $500 pw
    Option C - 2 houses in Logan, say Loganlea, Browns Plain or Marsden for $680K with rent $640pw

    I chose Option C
     
  14. Simon L

    Simon L Well-Known Member

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    People tend to forget volume when they buy for cashflow vs CG

    They always compare 1 blue chip property to 1 cheaper cashflow property

    The reality is, 1 bluechip property for $800k can = 5 cashflow properties for $1.5mil because you can afford to own more and your serviceability will be better with cashflow

    If both scenarios experience just 10% CG, which would you like to hold?
     
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  15. Anthony Brew

    Anthony Brew Well-Known Member

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    Thanks @Leo2413, @Lacrim

    Yeah this is basically my situation.

    First IP mostly paid off (had to be because I had no steady work so I saved up a massive deposit), so cashflow was very high.

    Contract signed on second IP last week. It's low yield but I think it has a good long term outlook growth-wise, and also due to what I think will be higher demand driving this, I expect rent to (eventually) rise in line with the growth.

    To get equity released, I had to refinance first property with the new lender, so both proerty loans are new. And due to living overseas I could not get IO on them.

    The net rental yield will cover the interest entirely (32k/yr) but I have to put in the principle part of the loan myself (16k/yr) - which is ok with me because my cash goes into paying it off.

    But due to only option being P&I, I am a little concerned with the idea of getting another low yield property becuase of the amount of cash I would need to put in. The worry is just a worst case scenario if I lose my job or something. Plus in around 5 years I would like the rent to cover P&I on its own (or most and just use a little from my offset to make up the rest)

    So for this reason, I was hoping to find something with an "ok" yield.

    For example, what was mentioned for 500/wk for a 680k property is 3.8% yield.
    This is lower than what I would be comfortable with.
    But on the same hand I don't want to toss out growth entirely just for yield.

    So my question is. how would you find a property with a more balanced yield and growth ratio, something like 5-5.5% yield, yet stil likely to have some reasonable level of growth. It does not need to be CF positive or even CF neutral, but I am hoping for something that is not too far from neutral to limit the amount of my own cash that would be needed.


    To put it in your words, I am looking for something that is closer to the middle of the spectrum that has a more balanced yield and growth ratio.

    Any thoughts how to go about selecting a location for this?

    Also note that I probably won't be purchasing for 1-2 years, but I am trying to setup a strategy now to work towards on how to find such a property.
     
  16. Anthony Brew

    Anthony Brew Well-Known Member

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    Thanks Simon. Appreciate the reply.

    Couple of things though

    1. I don't think yield will produce such high serviceability to double your borrowing power. I have run the numbers a few times and it has never stacked up that yield made much of a difference in terms of serviceability. The limiting factor is often salary combined with paying down debt quickly. Yield sounds like it pays down debt, but it is so small that it is negligible in today's serviceability calculations. I definitely would want to see the numbers where you can borrow double due to higher yield. I think it would be closer to 800k vs 1m. Maybe it was very different until the recent APRA changes?

    2. I think the idea is that a blue chip property is defined as a blue chip property because of the high demand, which would supposedly mean higher growth.
    So in that case one might assume 800k @ 10% and 1m at 6%.
    But I am less sure on this point than I am on my first point. Especially since sometimes slightly cheaper outer suburbs do very well percentage wise, but I am not sure how likely/normal this is.
     
  17. bread_boy

    bread_boy Well-Known Member

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    This is the problem I/many have run into.
    Replicating the 'volume' strategy made so successful by some on this forum is no longer possible.
    My recent 2 purchases in lower socio-LCC both yield 7%+ but this no longer matters because I get assessed at 7.25%P&I on my next loan so how many more can I buy? One, maybe 2? but not 7,8,9+ like those before me.

    In this current lending climate I would rather hold 1 bluechip (or even greenchip) property than 2 fringe area properties.
    If there is a correction, I know the property will hold steady because there's always OO appeal (and banks are hungry for OO lending atm anyways so in theory they can still get finance).
    For my properties in lower socio-LCC - which comprise of 50% investor ownership, what will happen to my properties from the inevitable fire sale that comes when those that have gotten onto the bandwagon late are squeezed by rising interest rates?
    A 7% yielding property is no longer +CF when rates are 6%.

    The way lending is heading, the next purchase(s) I make needs to count because I only have another 1-2 more max regardless if they are +CF or not.
    For this reason I'm buying a property in the best suburb with the highest chance of growth I can afford to hold even if its NG.
     
    Last edited: 23rd Jun, 2017
  18. Lacrim

    Lacrim Well-Known Member

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    Agree. The ratio of 1 blue chip property or 5 cheapies is not as straightforward as some people have quoted - I don't think it ever was either given the shading the bank applies to rents.
     
  19. Lacrim

    Lacrim Well-Known Member

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    5-5.5% is difficult in this market bc interest rates are so low. Go for the sweet spot then - look at decent suburbs within 10-12kms of the city eg Carina, Geebung, Banyo etc of this world (if buying in Brisbane) and try and find a house where you can create an extra 1 or 2 beds by changing the layout inexpensively but without extending the house.
     
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  20. RetireRich101

    RetireRich101 Well-Known Member

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    what is a 'blue chip' property? BHP in the stock market is a blue chip shares.
    is it based on past performance of capital growth that is exceptionally well?

    what is a 'more desirable' suburb? Is Banyo, Geebug desirable for some? arnt they too close to the warehouse/industrial to be desirable for some people.

    with Sydney over populated, I feel more desirable in the outer suburbs, depending where you are in life.

    is it really just about the bank calculator and buying more? for some people, it is about keep your shirt on for next few years....

    ....and try to do the same calculation on a' blue chip' property 680K on 3.8% yield when IR goes up 6%, plus PI payments and property market stagnates for the next 3-5 years.... It's not about buying more, it's about keeping your shirt on and money in your wallet for bake beans when you're in the bunker.
     
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