The property couch - growth vs yield properties

Many years ago i did an investment training bootcamp. I left feeling it was a waste of time and money because it focused on psychology and CF+ IPs without any strategy

Today i believe it was spot on. Psychology plays a big role with investing and life in general.

To quote what my son keeps saying "if it was easy, everyone would be doing it"

 

100% agree with you on that.

 

I know this much. When the economy hits the skids, Logan will get hit harder than Grange. I remember when Sydney faltered a few a times since the boom of 03, the likes of Mt Druitt went backwards quite significantly (a buying opportunity for some perhaps). My neck of the woods (Randwick) hardly dropped 2-3%.

I bought both in Campbelltown and Mt Druitt in 2012 for prices that were almost comparable to 2003.

There is something to be said about the relative stability, hardiness and perennial appeal of 'better' areas, having held both in my portfolio. Both have pros and cons.

Anyway each to their own. I'm not trying to tell someone which is better for them, just what's worked for me and my preference.

 

Somehow this course you went to reminds me of Peter Thornhill stock market investment strategy...Property market can be irrational... it goes up and down and lot of scare mongrelling here and the media... If my dividend check (rental) continues to go into my BSB and still a surplus after paying my mortgage, then what really matters if the property falls 20%...ie if you're postive about the market that it go up beyond 20%+

 

I would think the majority of properties would have an inverse relationship between cg and yield.the ones that offer both will be very hotly contested - like the above - if it were easy to find and buy such properties that offer both, then everyone would be on it.

 

Logan is a LGA, then rest of the examples you used are suburbs. There is a big difference. Logan could or may get hit hard when cycle retract, or it could go up fast and higher than Grange when it booms...it's all speculation

Not a advocate for low SES for long term hold, but they could be a good capital growth boost if you got the timing correct, evident that you purchased campbelltown and mt druitt in 2012 which was a great timing..

As for the blue chip versus outer/cheapie discussion, I leave you this post and few post after that..

Brisbane/QLD Overhype

 

You guys are all investing in a Wolf that was slayed in the end

 

@skater in this post just shown a cheapie suburb in Sydney Campbelltown purchased for 90k in 1998 and in 20 years it is now worth 600k...It's grew 560% over the 20 years.

Campbelltown is still consider cheapie suburb in Sydney

 

The reality is the CG property would allow you to buy more property as you have the capital which is the hardest part of getting your first few properties. I would rather have a 3 CG properties worth 2.4M and transition into CF later than 5 CF worth 1.5M and try and transition into growth.

With my last purchase I spent 700k on it and getting 420 pw in rent, looks horrible doesn't it. However this has 1,600m2 of land 10km from Brisbane CBD, now this looks good as the median house is 580k for the suburb. So if I spent 250k each development (750k/1M) + 700k this would = 1.5M development and the 3 houses or 1.75M for 4 with the value sell value (based off median which these are new so should be higher) would be ~1.75M for 3 or ~2.3M for 4.

The rent would be 420 each (likely more as new) so rent could be 1260 or 1680 pw which would equal a yield not including deprecation of 4.4% or 5% from 3%... Suburb median right now is 3.4%. If I changed the rent to 450 as it was 'new' the yields would be 4.6% or 5.35% with the maximum amount of deprecation.

Even if I choose not to develop now (which I am not) the land price has been locked in and the development cost wouldn't increase to dramatically but the values of the houses likely would (due to land). After all if you are buying the median house at 580k in 5 years time it would like be worth more than 700k (being conservative) so if I developed in 5 years at 700k the numbers stack up even more.

 

There is definitely arguments for and against, and I think the best case scenario for an average investor is a balanced portfolio with both cashflow and blue chip properties in the long run. It also depends on your strategy, goals and how aggressive of an investor you are

Cashflow is important as it allows an investor to hold onto their properties during bad times and helps cover a lot of ownership costs across their portfolio (maintenance, vacancies etc)

Its all beer and skittles owning a few blue chip properties when interest rates are low, when the properties are tenanted and nothing needs fixing.
But even when all is well, blue chip properties are still costing you a lot of money every week to hold onto, so imagine when that vacancy does happen, when interest rates jump or if you lose your job/health problems arise? You will be forced to sell your properties prematurely like plenty had to during the 10 year stagnant period in Sydney before the boom. The only saving grace for blue chip properties is the hope and pray that it will go up before any of this happens to you - speculation

I would also say that not all cheapie lower socio areas are equal. There are some that have not moved much and some that have clearly outperformed blue chip areas like Western Sydney. The link @RetireRich101 posted above also shows Woodridge has been doing the same. Demand fundamentals are important when picking which cheapie area to buy in.
Social factors also come into play - a property going from $300k - $600k is still considered affordable by median income standards. For a property to double from $1mil to $2mil? How sustainable is that and what will be the demand?

 

Which is why I specifically said I'm buying in the best suburb I can afford to hold.
So even if I can't buy in 'blue chip' lower north shore Sydney maybe I have a chance at inner west or northern suburbs. The point is because lending changes are limiting my ability to expand my portfolio indefinitely (prior to APRA if you found 7% yielding property the loan would be approved and you could go on and on) so I would rather buy 1 property in a good suburb with strong OO appeal (>70%) than 2 +CF/neutral in a lower socio-suburb with 50% investors because I won't be able to grow beyond that for now anyway.
I've played the yield game. It's worked for many on here and was working for me. But the rules have changed. So I have to adjust my strategy.
If my end game is financial freedom what will get me there faster in the current conditions?
1 property in blue chip suburb with high growth potential - location, lifestyle drivers, OO appeal - that will at worst flatline during a correction (that I have forecasted I can hold onto even if interest rates reach 6.5-7%) or 2 properties generating $50/w for now (and will be negative at the aforementioned rates anyway) in a lower-socio suburb which will go backwards once the squeeze comes on?
In a nutshell, I have 2 choice:
1) 1 x blue/green chip property
2) 2 x crap chip properties

Yield/6% interest/P&I is irrelevant because I can afford both even if **** hits the fan so I'm going option 1.

That's my situation. Others will be different.

 

Are you joking?

Sorry but I seriously considered buying in Woodridge a number of years ago and glad I didn't.

Woodridge Property Market, House Prices & Suburb Profile
2008 - 270k
2016 - 299k
= 30k CG

Hardly doing well, even as of 19th June 2017 according to RE.com median house is 295k (4k loss)... Yup doing well...

Watsonia Property Market, House Prices & Suburb Profile
Instead I bought in Watsonia
2008 - 400k
2016 - 677.5k
= 277.5k CG

Lets make them roughly the same price 3x Woodridge (810k) to 2x Watsonia (800k) I will let you keep that 10k;
Woodridge CG = 90k
Watsonia = 555k
Difference = 465k in favour of Watsonia

Unless EACH Woodridge has been getting $331.20 pw CF+ after tax and before deprecation then it would of equalled Watsonia. Note Watsonia only really boomed this year and the median house price right now is 770k (92.5k more), where as Woodridge is 295k (actually lost 4k so far this year/flat), so if I ran the numbers using today figures now it is;

Woodridge - 78k
Watsonia - 740k
Difference = 662k in favour of Watsonia

So the CF+ number each Woodridge property would need is $471.51 after tax more than Watsonia houses. Even at an extreme CF- of $200pw after tax would be still far superior than the Woodridge by $271.51 pw return.

Note I could of included a recent sale in Watsonia where the vendor had 426k 8 years ago (not 9) which was the median house price then and they recently sold for over 1M with only painting but will exclude this.

 

BTW I'm not a Logan basher. I'm only using lower socio-Logan as an example because I've purchased there. But the same argument can be made for any location(s).
E.g. Would I rather buy 2 x properties in Elizabeth SA (yields 7%) or 1 x property in Essendon VIC (yields 3.8%)?
As long as I can afford to hold at 6.5-7% I'm taking Essendon each time in this lending climate because even though the -CF (and they will both be -CF @ these rates unless you buy in Broken Hill, NRAS, dual occ) hit is harder I believe it will do better CG which will ultimately get me to my goal faster.

Yield keeps me in the game. CG makes me rich.
Why would I go +CF if it doesn't let me buy more now anyway?
I can afford both choices so it only make sense to buy for growth.

 

Are we still talking about lower socio-Logan? Would be interested to see stats to support this. Perhaps @RetireRich101 can assist with this?
I'd like to see any suburb in 4114, 4132 or even 4133 that's outperformed any Western Sydney (which I don't consider blue chip - inner west is as far as I would go in terms of classing as bluechip) suburb in the last 5 years.

 

Apologies I should have elaborated....comparing percentage growth from Western Sydney to blue chip Sydney areas.

 

I hope this isn't becoming a Logan vs (insert CG suburb here) debate. I'm not against Logan. I bought in 4114 & 4132 in the last 6 months (both yielding 7%) because I believed the best way to my goal was volume. I sincerely hope it goes gangbusters.
I'm just highlighting the fact that the banks no longer allow me to play the volume game. I will be stopped after another 2 max even if they were to yield 8%.
So if that is my reality and my end game (financial freedom) is the same, IMO it's better to buy for CG vs CF.

 

My comment was directed at this link, so I am not sure why you are comparing a 20km Melbourne suburb to Woodridge. In that instance, if we compared Watsonia to a similar suburb in Sydney within the same timeframe you could have done a lot better also

Conveniently 2008 was near the last peak in Woodridge and I'm glad you didn't buy at $280k as well. If you bought just 3 years later you could have had those same properties for $200k or below. Worth considering that although SEQ has experienced sustained growth in the past 36 months, the 'boom' has yet to happen and as you say Watsonia has had a boom only this year

Are we comparing apples to apples?

 

sorry I had map google where is Watsonia

Watsonia is Melbourne?, a booming market and I don't know what the demographic is there
Brisbane hardly boomed.
not really sure what you're comparing here? apples to coconut?

 

There are suburbs in Brisbane in the last 3 years that grew like 30-50%. So while it's not a boom, those are good stats in my book.

Now what makes it ever better is that many of those properties which have increased in price have very good add value potential so if that is realised in the future, it will be a massive chunk of equity/profit added.

So indeed Brisbane hasn't 'boomed' yet but in the last 3 years there were some stella deals around. Those deals are now gone because the add value component is dead due to the higher buy in cost in the current market. But for those who had the foresight to buy them then, some very savvy deals were bought.



Me 2 cents.

 

As @RetireRich101 predicted, this turned into a growth vs yield thread, which was not my intention.

I can see it was my fault, because in my mind, I am trying to answer this question

Generally what should I be looking for if I wanted lower holding costs (ie 4% yield is too high for holding costs for my situation) while still.... having a fair prospect for growth​

which is always going to end in the same debate due to that last part

I think maybe I should change my question to this

How would you go about finding where are the best possible locations for a long term B&H investment with the condition of at least 5% yield​

Or should I be changing my question further?
It looks like there are much lower yields in most major cities now due to very low interest rates, and yield in the long term tends to follow interest rates because people need properties available to rent and in turn need investors who will not invest if they can not get a rental return that can pay for approximate holding costs which are directly related back to interest rates. So I then wonder, if yield will improve over time, but then again, it improves with interest rates, which means no improvement in "real" terms.
I think a lot of people who purchased early in the boom or just before it (say 2009-2012) when interest rates were also a bit higher, had naturally higher yield available, and they got very lucky with lowering interest rates in the following years even though rental prices did not reduce, so they just ended up with an ability to have holding costs be much lower due to things entirely out of their control. In the same way, purchasing now will be the opposite and I feel like it is mostly out of our control - interest rates are at an all time low and will be rising and anything purchased now will be the opposite with higher interest rates and rents taking time to play catchup increasing holding costs in the coming few years.

Waiting until the situation changes sounds like a good idea, but these things change very slowly... it could be 5 or more years before interest rates rise to 7%+ and could be 10 or 15 years before it hits a local high and comes down again to produce the same situation of lowering rates. So for this reason I think waiting is not a realistic option (unless you a whale and your lifespan is 200 years lol)

So I think, to be pragmatic, maybe it is best to come back to my revised question

How would you go about finding where are the best possible locations for a long term B&H investment with the condition of at least 5% yield​

Any thoughts on whether this is the right question to ask?