The property couch - growth vs yield properties

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

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  1. Big Will

    Big Will Well-Known Member

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    Woodridge is 22km from Brisbane CBD so pretty much same location.

    Maybe look at the numbers 'pre-boom', ill make it simple for you with the extract below;

    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.


    I believe we are comparing apples with apples.. If you would prefer same state then have a review of my post 133 on thread Capital Gains vs Cashflow (sorry don't know how to link) which compares Rosanna to Ballarat (CG vs CF).

    I could also pick numerous other suburbs around Brisbane which have done better than Woodridge (see Sunnybank) but I was talking anecdotally as I did very much consider Woodridge (inspected probably about a dozen houses) however I ended up purchasing in Watsonia.

    My latest purchase was in Brisbane as I see more CG potential here, guess I am speculating as you would put it but so far my speculation has gotten me 662k more than I would of from the same timeframe.

    I know Sydney has done better but the CF- was to much risk for me to take on but shall we compare Sydney to Woodridge? As the CG vs CF debate would look even more one sided...
     
  2. bread_boy

    bread_boy Well-Known Member

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    If that is the question I would go about it in this manner:
    1) Identify your budget
    2) Pick capital city (Brisbane/Perth/Adel seem to be the preferred on this forum because of where they are in the cycle).
    3) Compile list of all suburbs yielding 5%+ within 30km from CBD
    4) Identify suburb closest to CBD
    5) Identify best tree-lined street(s) in that suburb
    6) Buy a house/townhouse/unit in 70's build walkup block (in that order) in one of those streets.

    Other things to consider would be transport, education and lifestyle drivers (shops,cafes)

    Or am I misunderstanding the question?
     
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  3. Big Will

    Big Will Well-Known Member

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    It was anecdotal with my thought process behind it and I also gave the 'pre-boom' numbers see posts above and didn't include an anecdotal of a 2008 house for 426k selling for $1,010,000 last weekend... So apples with apples.

    I know Brisbane hasn't boomed but my recent purchase I made is in Brisbane because I am 'speculating' as others put it Brisbane will do well in CG.
     
  4. skater

    skater Well-Known Member

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    This is incorrect, especially if your income is limited, and even more so in this environment with APPRA breathing down your throat.

    Let's take your example of 3 x properties worth $2.4M. That makes each one worth around $800k each. That's all fine & dandy if you've got a big income, but the average person can't do that, especially with a low yield. With a lower entry price & a higher yield, it makes it quicker to buy again, and again, and again.

    OK, great....I see where you are coming from with this....but this is NOT an entry level property for the average man in the street. At the end of the day.....how many of this type of property can you realistically afford to hold at the one time? It depends on your income level, right? But even on a high income, you can't hold a lot of them. You'd run out of serviceability unless you did something to increase either the yield or your income....or both.
     
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  5. Sackie

    Sackie Well-Known Member

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    I seriously don't know how you can debate something where it really depends on so many individual factors. There is no 1 right strategy for everyone. There really is no debate as to what's better imho.
     
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  6. Big Will

    Big Will Well-Known Member

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    Agreed you cannot hold heaps of NG properties but CF in time will slowly or you can make drastic changes (e.g. develop) and it would improve dramatically. Where as the CF route you have to save more money yourself for the next purchase or you will run out of capital to purchase the next property.

    A 400k property with current APRA lending require 80LVR or 80k deposit, how long will this take to get with $50 pw extra? This will take nearly 31 years (not including tax) even if you get 40k growth (10%) in 3 years you would only have 53k at the end of this time (not including tax). That 40k you would likely only be allowed to withdraw 32k (80LVR) + CF+ of 7.8k (less tax = 5.5k) = $37,460.

    Compared to a 7% 400k growth year on year CG costing $50 pw = 490k value or 90k growth - holding cost 15.6k with the inclusion of NG = 10.4k after tax costs = $79,600.

    Not saying to ignore CF when making your decisions but CF+ you pay tax on today and will keep costing you more in tax each year (unless you offset this, OMG NG) and purchasing more CF+ will increase the amount of tax you pay each year. Where as with CG you likely don't pay tax on your CF (due to NG) in fact you actually get it refunded.

    So in theory you can pay 30c/50c tax or get a refund of 30c/50c per dollar which is a difference of 60/$1.

    With the CG you can always turn this into CF ventures (business, development, future purchases, shares other investments) and yes you will need to pay CGT when you sell but I would rather get 200k (in a way tax free) today and pay that tax 20 years as the 200k is worth a lot less in the future then get 10k per year and pay 3k tax per year for 20 years.

    If someone is on single 50k a year strategy then then they should target the most CG they feel comfortable with which is likely to be none. However our salaries you would call average - both wife and I work but we are not high income earners. However my suburb according to RE.com has increased by 100k in 6 months this year which is far greater than peoples income p.a. I also have shares that have gone up 20% this YTD in 6 months when the ASX200 has been flat in the same period.
     
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  7. skater

    skater Well-Known Member

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    But here's the thing......the yield also goes up in the lower priced properties, AND if you have bought well, you will STILL get the CG. It's not one thing or the other, you can get both!

    The difference is that, as your yield is better, you can hold more properties without affecting your serviceability. When it comes time to sell, you can split your sale into different financial years, so you can reduce your CGT. So, instead of selling a $1M property in one year, you can sell one $500k property in one year, then the next one in the following financial year. Or, heaven forbid you run into trouble & you HAVE to sell something, you don't have to sell such a large chunk of your asset base.
     
  8. headsonbeds

    headsonbeds Well-Known Member

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    I love the idea that CG is so easy to pick! It's not. Didn't the Sydney boom start in lower cost, CF+ suburbs. CG is often an educatedish guess, nothing more - talking major centres here. These direct comparisons are just to tough, Remember that 9% yield is the equivalent of 3% growth and 3% yield is a 3% loss of capital, working at 6% costs.

    It's simple just do both. LOL
     
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  9. Big Will

    Big Will Well-Known Member

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    Getting CG is harder with CF+ generally speaking, some people make a killing in CG (mining towns pre boom) and others lose significant capital (Moranbah/Gladstone) going for CF+.

    I am not suggesting people by in Sydney as it has records low yield due to record growth/boom... Not at all but I am sure you wouldn't be suggesting them buy a mining town which is CF+ (Moranbah during the boom was getting 15.6% yield - 3k pw on 1M value).

    Serviceability is very hard to get today as your loan are calculated at 7% P&I which hardly any of these CF properties would actually be calculated as it but rules will change. This can mean someone can buy 1x 800k property or 1x400k and another 1x300k as you have a 400k loan which hurts your serviceability another thing to consider as banks are targeting home owners and they have lower interest rates they is a good potential that they can buy/upgrade to a nicer area which typically comes with not being CF+ as banks are giving them much more favourable interest rates compared to investors. Sell in different FY, plenty of ways to also manipulate this as well and requires planning just as the example you gave.

    As for having to be forced to sell there are strategies around this which are many but simple ones would be cash reserves sitting in offsets to get you out of difficulty (shock) or sell shares as a good portfolio would be diversified. If I lost my job (highly doubtful) and I couldn't get a job (even more doubtful) and we lost our tenant and wasn't able to get it rented we would have 1.5 years in reserve without touching shares. Now the chances of all of this happening would be extremely small but possible, if our tenants were still renting and I lost my job we would be okay for likely 4-5 years.

    The reason why we have such a large reserve is we are still building our wealth and have taken risks but overall we are still CF+ (due to salaries) as our bank accounts are growing. One is very slightly negative by $70 p/m average but this is left over investing money and we pay a gardner to maintain our 1,600m2 property as we don't want trees growing on it as this would hurt our future potential on the property but really we could pay that money from our 'personal' funds just this makes more sense as it is an expenses, we also pay rates, insurance etc too.

    If I was unable to work due to illness, got cancer or one of us was to die we would be okay just the same as we have insurance for this (Life, TPD, Trauma, Income, Private Health cover, Building, Car, Contents, LL). So pretty much all of what has been looked as a negative you can pretty much mitigate.
     
  10. skater

    skater Well-Known Member

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    It is just as easy to get CG, but you have to be selective. I've never suggested buying in mining towns.

    Look.....this sounds to me like you're a bit emotionally invested in this talk and making it personal. It does not matter what your personal situation is. It does not matter that you have a buffer of cash or shares, or any of the rest of it. That is all irrelevant. For all I know, you could be earning $200kpa, & have several $M in assets....or you could be earning $50k, and have nothing but big dreams. The point I'm trying to say here is that there is more than one approach, and buying up expensive properties, with low yields in the hope of CG, is not going to get the average man on the average income enough of an income/asset base, etc, to retire from the workforce. AND I know that because I AM the average person, we were on a low income, we DID buy lots of properties & they were ALL cf+, they ALL got decent CG, we sold a (very) small amount of them & Hubby has been retired for 2 years now living off of the cashflow.
     
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  11. Anthony Brew

    Anthony Brew Well-Known Member

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    I don't know how one would go about selecting a higher growth property that is currently CF+, because I thought that the reason a location generally will have a higher yield is to make up for the lower demand and resulting growth.
    Could you offer some thoughts on someone would go about finding these locations/properties?
     
  12. Big Will

    Big Will Well-Known Member

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    I never suggested you did suggest people buy in mining towns.

    Extract;
    I am sure you wouldn't be suggesting them buy a mining town

    Same as I am also sure you wouldn't be suggesting people buy in Sydney right.

    I know your story which I read but I also know many other stories of success as well some I have a personal connection and know someone who retired a number of years ago (think 6 years) and didn't have any properties in Sydney or Melbourne but focused on as much growth as they could afford but didn't ignore CF, which I have suggested numerous times and is part of my consideration. Hence the 1,600m2 property we bought, yes it is negative but the long term out look (we are 30 y/o) is this will grow and at any time we can develop when we need more CF. You cannot just happen to make more CG with a CF property and the chance of getting more CF is not to the same level.

    Yes there are many ways to skin the cat some are faster than others and the ones that are faster usually entail more risk. I could retire tonight if I got it right at the casino but my risk appetite doesn't allow me for it as I can also be out on the streets as well.

    For an assets to be worth investing in people should be aiming for 10%+ p.a. total return and getting that 1% more capital gain instead of yield with compounding effect really adds up as the CF+ you will get tax but the equity isn't (unless you sell) so in theory one gives you 0.7% vs 1% after tax. This is where you can then move it into CF ventures to offset and repeat.

    This 10% could be made up of 7% with 3% or 6/4, 5.5/4.5 and of course you can get more. Having 7% yield will likely be positive (especially in todays cash rate) but you will need to pay tax on it. This by no means saying that Sydney is worth buying with their sub 2% yield as it will give you 8% growth no people will make decision on price on what they think the future growth will be so it doubtful that it will get 8%+growth over the next couple of years. This is a contributing factor for booms/bust.

    However other cities where people feel (some would call speculate) they might calculate will get a 7% growth over the next couple of years so they are okay with taking a 3% yield obviously you want as much yield as possible but if it is 7% yield you might be a bit optimistic with your calculations/forecasting and if they are calculating that as 7/7 would likely be a place closer that you should calculate 10% growth/ 4% yield same as a place being further out with it being 10% yield and 4% growth.

    To give an example after Sydney boom Melbourne was the next logical choice, people in Sydney said the yield I am sacrificing will likely not retrun me the gains in return so they looked at Melbourne. Now Melbourne has boomed/booming investors are looking at where the next place for gains will be... A number of people are 'speculating' on Brisbane (including myself), the yield I am getting for our latest purchase settled March 2017 is 1% lower than the suburb median rent which I am okay with, does it mean I over paid I doubt it. However with MY risk profile and 'speculation' if you want to call it that I see much more positive things for it and as I mention before that 1% less yield got me 1,600m2 of land whereas there are houses on 400m2 and my fully renovated house with meile appliances and solar panels only cost me 30k more than a land value block 2 doors up (house was knocked down same day as settlement).

    I could of gone with 2x Townhouses in the suburb for the same price and my CF would be much better off however the TH have very little for me to improve upon where as 1,600m2 land gives me plenty of options.. Subdivide, develop, battle axe it, get plan approved and resell, extend, sell and if it wasn't renovated then renovation or hold.

    TH gives me the options of renovate, sell or hold.

    I would say most average couples their biggest issue is security/capital when starting, where as established portfolios would find CF more of an issue. This is why we went for the larger land as we can transition to CF when it becomes an issue.

    The CF properties such as units, dual occs, town houses, leave little choices for additional CG or CF besides market conditions sure you can renovate but this would add $20 pw in rent?

    Where as taking a slight negative gearing approach will usually mean more choices and flexibility is something a number of people under estimate.

    Even Nathan Birch is now looking for flexibility with selling some of his portfolio.

    Nathan Birch Is Selling His Properties?
    Nathan Birch Is Selling His Properties?
     
  13. Lacrim

    Lacrim Well-Known Member

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    I know that - its a crude example. I was considering Woodridge, Marsden, Kingston, Logan central etc etc back in 2012 so I do know Logan - to street level at the time (I haven't looked since) and decided I was better off spending more and heading closer to the CBD. I'm happy with my decision. I don't need a whole swag of problems - irrespective of selective studies of growth rates.
     
  14. skater

    skater Well-Known Member

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    OK, you still come across as this being personal especially with sweeping statements like.
    You don't need to buy units, dual occs, or town houses to get cashflow. You keep justifiying YOUR position with references to what you've done & why.

    What I am saying here is that if you are careful, if you choose wisely, you can get great properties in great areas & STILL have strong cashflow.

    This is especially true if you look for areas that are undervalued, or have a history of growth, but have been stagnant for a long time, so are overdue for a price rise.

    You don't have to decide whether to go for CG or CF, you CAN GET BOTH!
     
  15. Sackie

    Sackie Well-Known Member

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    I think we all agree CF and CG are both important. No point going back and forth on the same thing.

    Have a look at this gem unfolding. :)
    At 40 and no home
     
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  16. Toon

    Toon Well-Known Member

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    If you're prepared to consider regional cities and are not married to capital cities, it is not difficult to find properties with at least 5% yield that should also offer decent capital growth for B&H.
     
  17. ellejay

    ellejay Well-Known Member

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    How long have you actually been investing, did you buy your first in 2015? How many markets do you have direct experience of? Just curious because you must have an incredibly broad experience of markets home and overse as, over many cycles to be so adamant and unshakable in your view of how everyone should be investing (even when talking with investors who have been investing successfully for longer).
     
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  18. Beano

    Beano Well-Known Member

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    Yes this is point
    I have not seen many people who can afford to buy a cf- every year
    Can you run your numbers on a property $900k property yielding $90k all outgoings paid by the tenant funding at 4.3pc and see how if this would work on serviceability. ..this is real done ...done and dusted
     
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  19. RetireRich101

    RetireRich101 Well-Known Member

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    People's perception of future CG seemed it's for certain and is banking.
    Yes each to their own. Maybe pick a 'better' suburb in Logan LGA if you think those give you headache. Not sure why when people refer to Logan, the always refer Woodridge, Kingston, Logan Central only... Surely the other 50+ Logan suburbs may give you less swag of problems. Plus as vested interested in Logan I will be more steer you away from these suburbs. It could be a yield trap in some cases.
     
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  20. ellejay

    ellejay Well-Known Member

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    I can't predict what's going to grow but I always looked for less fashionable suburbs, with a local stigma attached not really based on fact, and lower price point than surrounding suburbs for this reason.

    I think it's hard to achieve cf+ with short term growth potential in Aus today on an average wage. Not saying it can't be done, but with so many markets and sub markets you probably need to network if you can't find examples in your local area. Big pockets will also make it much easier.