Where is the wealth Rental or Capital Growth

Discussion in 'Commercial Property' started by Beano, 25th Mar, 2019.

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  1. Beano

    Beano Well-Known Member

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    Has anyone compared the
    1:gross rent received
    2: capital growth
    3: net rental
    Over say 15 to 20yrs ?

    I was surprised at the result

    Net rents far exceed capital growth on all my commercial properties.

    this net rent of course reduces debt hence the mortgage goes down as fast as the capital growth

    How have others found their portfolio gone ?
     
  2. MWI

    MWI Well-Known Member

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    Much more then rent needs to be evaluated, CG in long term overtakes CF! Commercial lending differs, lower LVRs, shorter repayment options, could be even higher interest rates, more risky to lenders hence more specialized lending criteria.
    Also, depends on the tenant, depreciation considerations, hence different cup of tea to residential.
    Can be lucrative for income...friend prefers for that main reason!
     
  3. Ross Forrester

    Ross Forrester Well-Known Member Business Member

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    Cash is king. Focus on yield. I do not understand with the concept of wanting to lose money now with the prayer that somebody will pay more for your asset that loses money yes later on.

    If you want capital growth just re-invest your cash the assets make. And put the high cashflow asset into a low taxed environment.
     
  4. Beano

    Beano Well-Known Member

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    I did a simple calculation
    Added up all the years profits
    Took today's value less cost
    Profit was higher than capital gain
     
  5. MWI

    MWI Well-Known Member

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    Was this net or gross profit, was tax subtracted from each year's profit?
     
  6. Beano

    Beano Well-Known Member

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    Net after expenses
    Note that properties after 20 years are all unencumbered now
     
  7. gty12

    gty12 Well-Known Member

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    One reason arguably you and I often support one another on these forums.

    I don't have 20 years worth to go on, but I did do at a job an analysis of a lump of AREIT dividends over a general residential property. They were similar in terms of total gain only if one didn't take out a loan-similar because AREITs historically grew less in value, but had higher dividend percentage yield.

    I also did an analysis of commercial property versus residential property.
    My general finding was, if you assume a relationship between the rent and price of a residential property remains constant (i.e. yield remaining fixed at 3% even whilst property grows in value = which it doesn't but makes for easier analysis), then commercial was the winner.

    I can't remember whether I was comparing gross or net yields but in such a scenario it was basically taking residential anywhere from 20 to 30 years to catch up. There were no loans in these forecasts.

    Cheers.
     
  8. Beano

    Beano Well-Known Member

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    initial commercial purchases were made at 10% plus 20 years ago.
    Current debt is approx the properties purchased in the last decade so all properties purchased over a decade ago have been fully paid off by income.
    No income from salary as had retired 15 years ago.
    Not all Property income was used for debt repayments as supported 4 children through private school , university plus 3 adults!
    It seems like the "golden eggs" the goose lays every day is better than eating the fat goose that lays them :)
     
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  9. Property Guts

    Property Guts Well-Known Member

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    A lot of if's and but's to this....
    But i was curious of same. Held a retail south of Wollongong, from 2006 to 2014, 100% financed (with internal and external loans) i compared 6 years x total net income after tax, with total net capital gain after tax, and rental income was slightly higher than capital income, which i found surprising too.
    But, i think this figure could be different, depending on multitude of factors.
     
  10. Beano

    Beano Well-Known Member

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    I was surprised too.
    When I looked into it , it was the accelerated profit from increased rentals and loan reductions from the net profit.
    All properties purchased 15+ years ago are sort of debt free hence the cash flow.
     
  11. Omnidragon

    Omnidragon Well-Known Member

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    Interesting. Capital growth far exceeds rental in my parent’s commercial stuff, from what I can see. Different cities also. You play in Brisbane?
     
  12. Beano

    Beano Well-Known Member

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    Selecting a couple of your properties what is your ratio of gross rental to gross capital gains?

    I have selected one small and one medium commercial property in my portfolio
    Small
    Value $1.5m
    Gross Rental $180k
    Net yield 9%
    To exceed gross rental the property needs to go up 12pc every year
    Medium
    Value $16m
    Gross rental $1.3m
    Net yield 6.4%
    to exceed gross rental the property needs to go up 8.1%
    Perhaps the choice of high yielding properties has resulted in two features.
    1: lower capital growth
    2: higher portfolio growth (due to ability to continue to increase the portfolio from the surplus )
     
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  13. Clyde

    Clyde Well-Known Member

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    A commercial I purchased fifteen and a half years ago shows the rental return is about the same as the capital growth.
     
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  14. Illusivedreams

    Illusivedreams Well-Known Member

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    The issue I'm having now
    Commercial yields are 5% in Sydney /Melbourne have to look elsewhere.

    Can any one recommend where ? To look
    Adelaide I can achieve 7% but..... I
     
  15. Beano

    Beano Well-Known Member

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    Try VIC ?
     

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  16. Beano

    Beano Well-Known Member

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    One point that has not been discussed is the higher yields and cash flows enable a larger portfolio than one focused on CG.

    A larger portfolio even with a lower CG % can exceed a portfolio focus on CG.

    Most investors who focus on CG top out with a portfolio of say $10m due to lack of cashflow but one focused on Cashflow is still growing at double that
     
  17. Fargo

    Fargo Well-Known Member

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    Dunnno, about your's but I get higher yields BECAUSE of the CAPITAL GAINS, net 5% of value. The person I bought no 1 from in 1989 for 90k paid, 21k in76. The rent on that now would be 27k. With refinancing and X col. bought another 4. As had growth , tired of being a tight arse, being debilitated and as Euro's predicted servicability restrictions had already happened Sold the first one for 320K in 2012 , and didn't have any loan to pay back because their was plenty of equity in the other securities. Anyways on the sold one I have given up 150k in rent in 6 years; last year it was worth 500k ( was offered that) so I gave up another 180k in CG until then, now worth 640k So in one year the CG has equalled the last 6 years rent. The rise in value meant I could put the rent up 25% from 19k p/a to 27k p/a. A long term av CG is supposed to be 8% while 5% is considered what the benchmark for rent is . I was focused on yield but CG has trumped yield.
     
  18. Beano

    Beano Well-Known Member

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    do you buy mainly on yields ?
    All positive ?
    Or negative yield relying on CG ?
     
  19. Fargo

    Fargo Well-Known Member

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    I never wasted much time looking but you do have to know what you want and where by being informed and observant.. I was an opportunist, If I saw something in tightly held area while driving around and the yield was or could be made over 5% I snapped it up it doesn't happen often at a suitable time so you just have to go for it or miss out.. First RIP about 1997 didn't have a clue bought because of the nice garden and open surroundings looked relaxing, yield +, 120k, sold 2003 because by then no tennants wanted to do gardening. So sold for 50% profit and bought 2 hard find to blocks for town house development sold one for 25% profit before settlement.. Bought a couple more blocks for townhouse development and an established home in 2008 and 9 . which I snapped up hours after stumbling on them . All positive.. The only one that's not is the one Micheal Yardney to wasted my money and serviceability on.. when I thought I would challenge my bias in the 2009. Wanted to buy in Sydney but he was pushing S.E Melbourne with about 1% and falling net yield. Told me rents would compound up, they fell and only rose to 2008 level last year, while of course expenses have compounded. The RPL was originally bought for higher LVR and thinking it would be better CG than the CIP which was for growing income, but as the CIP had gone up 400% I sold 20% as a hedge so I could have a win either way I thought it maybe a bubble about to bust instead it doubled again. More than just yield needs to be considered terms have to be considered. I have had terms of 6 months payment in advance but at the moment it is a yearly payment by cheque in July. I have also had terms where I accept part of the risk by taking 25% of production which gave me a 100% yield on investment on initial capital and 20% on current value.
     
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  20. Fargo

    Fargo Well-Known Member

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    The first CIP was bought at an auction which I didn't attend I just ask a Landmark REA agent to buy it