Where is the wealth Rental or Capital Growth

I did a rough calculation on my portfolio
CG has averaged 5pc pa
Net rental 20pc (initially they started at 6.5pc to 14pc)
So annually

If you look at a average year would your rents exceed the CG ? Or would the CG exceed rental.
The cost of ownership I assume would substantially less than the rents?

 

No, on a typical year with the most common type of lease agreement the CG exceeds rents. Long term ( over 100 years) CG is 8%, p/a. The comparative low interest rates for commercial loans, mine is 4.36%, is half what I considered normal, with max LVR 60% , interest cost on acquisition price is about 2.5%, less tax deduction, so about 2% which amounts currently to about 15% of rent, council rates are the only other expense perhaps 8% So For Rent of 27 k, 4k goes in interest and 2k goes in rates. Make about 20k profit from rent but averaged 3X p/a CG for the last 5 years. If you put it on a graph with lines the CG would be below yeild on the left hand side after 6 years the lines would cross and their would be divergence and an growing gap between the lines. Over the medium term the CG allowed me to increase leverage and get greater CG to the point recently that my net assets are greater then debt owed. Originally was aiming to just pay of a $1.4m loan for 2 million in debt free assets and living of the income. . With wife and kids paying loan down wasn't happening. but with some unexpected CG . Got $2m RIP, 2m CIP, 1m in shares, 1.4 m LOC with 900k drawn.

 

Here’s one comparable.

Bought $1.8m 20 years ago. Not sure what rent was at the time as I was a kid, but probably $120k from memory.

Today value around $24m, renting $350k or so.

A lower yield example one would be bought $4.5m in 01/02, renting I think $250k for many years. Now probably around $50-70m, renting $700k or so.

So cap growth would’ve far exceeded rent no matter on any calc especially in the case of the second one. Function of foreign capital flooding prime development sites in syd/melb, just about height.

 

They are unbelievable results
There is nothing in my portfolio or my friends that has had that sort of growth.
I added up all my net rentals and they exceed my capital growth however I have had nothing like your growth
Congratulations ...I need to take a leaf out of your book.

 

I bought a property in Brisbane for $130,000 in 1993, today worth around $1.2m, has had a few small renos over the years, nothing major. Returned around the 5% from day 1. Still own the property. In 1994, a colleague purchased 2 properties, around the $60K mark, 30Km from Brisbane. Positively geared from day 1, and today are worth around the $280K each (sold about 10 years ago). I know there are other considerations, but over the long term I always choose capital growth.

 

Amazing results!
Congratulations
Hate to say it as my performance is so poor compared to yours and omnidragon ...I cannot compete with you :-(

Properties I purchased in 1993-5 are only worth double but the yields are now 20 to 24% net ...(earlier this year my mates have been still buying these types of properties at over 12% net yield ) ...the mortgage of course been fully paid off from the surpluses!

 

May I ask where you can get a 12% yield from in this day and age Beano?

 

If rent is increased are fixed at x% is it naive to think that CG is the same for a commercial property?

Also on CF vs CG my father bought some CIP over the last 20 years inner city in melb/syd. He sold the syd one for 4x the price after 10 years. The Melbourne ones bought mid 90s are worth 8 figures each now and paid maybe 1m each at the time. The ironic thing is his land tax bill is 2/3 minimum his rental incomes. They are/were both OO to an extent however. He was always about the yield play but got the CG instead. At the end his yield was as low as 1-2%.

 

The adage I think is not CF vs CG but the quality and appeal of the dirt a property sits on.

 

Commercial in NZ provincial

 

Wow these are exceptional growth that turn into generational wealth to pass down.

Are they retail, offices or industrial CIP just out of curiosity?

Thanks,
FXD

 

This is a great thread re CF vs GC. However, I do have a question, ie: is it really CF vs GC or
is it on the total return made up of CF + CG together?

I see that over time the two just vying for the pole position like pendulum swinging from one side
to the other while the overall return being capped in some historical range. However, with both
enjoy the compounded increase over the years, the return in dollar terms could be exceptional.

Anyone has some insights to share re above view?

Thanks,
FXD

 

I agree total return should be considered overall BUT, CF will be taxed each year, and then land tax could take out a large chunk in addition, so for me CG would surpass CF, especially in the long run (CG would be compounding growth, whereas CF would be be taxed each year).
So CG is your wealth creation whereas CF would be your income creation.

 

True when taxes are taken into consideration. It will be even nicer if we have something
equivalent of the US CGT 1031 exchange rule that allows one to sell, retain CG and roll it into
next deal(s) and effectively defer CGT so it doesn't have to be paid in the FY when asset is
disposed of

Cheers,
FXD

 

Would rather be cashflow rich and be able to find and access more opportunity.

Being asset rich is great only if its realised.

 

Agree, but couldn't you just sell and create the cashflow you want?
Say I have bars of gold, yes I realize they are not money but I could sell some to obtain that money, that cashflow?
Say I have shares, again could sell some shares, have properties sell some (I agree some would be harder to sell in tougher times but still...?).
Hence isn't it the whole point to cash out some assets, or draw out of them, otherwise why would anyone wish to accumulate assets?

 

1: CF does compound when you use the surplus to reduce the mortgage
2: Yes we do add CF to CG to equal total return
3: Land tax can be avoided by buying in say NZ
4:On average my average year the net rental will be similar to the CG (on total portfolio)

 

Or would you rather have no CG tax like in NZ pay a third less tax (marginal top tax rate) , no land tax and no stamp duty ?

 

Accumulate assets to pass onto the next generation

 

But this is not the same comparison:
1. Whatever CF is earned it will be taxed first then will reduce the mortgage.
Assume compounding of $1 -> $2 -> $4 -> $8 -> $16 ->$32 ->$64 ->$128 ->$256 and so on. BUT lets say 50% tax for simplicity is taken out then $1 = $0.50 and only that compounds.
So $0.50 -> $1 and so on (even if we add CF it will always be taxed first).
CF is important but it is CG (the asset) that create real wealth. Also most people will spend some CF I doubt all is reinvested?
2. Now we are not comparing apples with apples, different country, subject to different government changes, rules and laws, not to mention possible currency changes.
3. As point 2 but is CG similar in comparison to Australia?
4. What do you mean by that, so on average your CF return, say it is 4%...then CG would be 4% too? Or do you mean in $ value?