Would you still invest in Property if Growth is say 2% p.a.?

Discussion in 'Investment Strategy' started by Terry_w, 22nd Apr, 2020.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    If property had a very low average growth rate would it still be worth investing in it?
    At what level would it no longer be worthwhile?
     
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  2. Beano

    Beano Well-Known Member

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    Two percent growth is fine
    If the net yield was reasonable (say 7%) and the property did not depreciate (that is no building) and borrowing cost low (say sub four percent) then yes it is ok.
    So say you found a $32m property (net yield say 6.4%) you could fund 100% (using existing equity) paying say 3.2% you would make $1m profit (before taxation) ...so at 6.4% yeah a $1m pa is worth getting out of bed for. :)
    Probably a lower net yield (combined net rental and estimated growth ) than 7% would be the crunch number I would not go below!
     
    Last edited: 22nd Apr, 2020
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  3. devank

    devank Well-Known Member

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    2% return means 8% return on your 20% deposit+ 5% cost thanks to the leveraging effect.
    All provided, no other investments are safe and the cashflow is not negative.

    Maths:
    Asset value is $100. Hence, the growth is $2.
    Deposit = $20
    Costs = $5
    So, your own money is $25.
    Return on your OWN investment = 2/(20+5) = 8%
     
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  4. Beano

    Beano Well-Known Member

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    Once you have a mature portfolio spare money is used to reduce debt .
    New acquition .. are then fully funded from equity .
    Don't really look at returns that way ...just look at the bottom line !
     
  5. gman65

    gman65 Well-Known Member

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    Sounds like Brisbane most of the time....
     
  6. Trainee

    Trainee Well-Known Member

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    Crystal ball isnt that good. Though that is a good point. Are brisbane unit buyers, say, expecting growth higher than the last 10 years?

    or is ppor different?
     
  7. Heinz57

    Heinz57 Well-Known Member

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    Beat me to it! 2% is a good result ATM
     
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  8. AndrewM

    AndrewM Well-Known Member

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    Has to be relative to other asset classes.

    Considering the volatility associated with investments like shares and the greater wealth accumulation you can achieve through higher leverage and greater tax benefits I think property is still attractive even with lower assumed growth rates. A different situation maybe where you are negatively geared and aren't expecting significant capital growth though.
     
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  9. Rugrat

    Rugrat Well-Known Member

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    Considering yield is typically my main target, yes, I would still invest in property. Capital gains is nice, don't get me wrong, ideally Id like both yield and capital gains. But my strategies have always centred primarily around yield. Get a good enough yield, it pays off the investment, and gives you an income to live off and / or reinvest elsewhere. If you are buying to hold and never sell, then you are never going to actualize those capital gains anyway. (Although they certainly can be good for leverage.)
     
  10. Omnidragon

    Omnidragon Well-Known Member

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    That means equity doubles in 12.5 years. Too slow for me must say. If there was a high yield game maybe, but would only do it for diversification/back up reasons, not what I would expect to be serious wealth creator.

    Obviously there’s risk with yield as we can see in this market (retirees indefinitely cutting rent by 30-50% on what they thought were blue chip tenants like Hungry Jacks or Chemist Warehouse).
     
  11. spludgey

    spludgey Well-Known Member

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    If it's 2% above inflation, then yes, possibly. Depending on the yield of the property.
     
  12. Quanty

    Quanty Member

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    Assuming your opportunity cost of investing in a property delivering 2% capital growth + ~3%yield is shares delivering ~7.5% p.a. With rough calcs I think shares give a higher expected return despite having no leverage.

    I'm currently deliberating this before buying my first IP or continuing with shares for Financial Independence.
     
  13. iloveqld

    iloveqld Well-Known Member

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    I love you, oops not, I love QLD
     
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  14. iloveqld

    iloveqld Well-Known Member

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    Timing decides everything. It is totally different if you just started invested in share last year vs year ago or NOW. Similar to Properties. The best strategy I found is to jump between them :D
     
  15. Rex

    Rex Well-Known Member

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    For a real rate of 2% capital growth yes if leveraged, provided the property is neutrally or positively geared (not hard right now...). As others have said, this amplifies to ~10% gross return with 80% LVR leverage, which is a bit better than equities. But considering the greater cost and work in holding property over equities, you'd have a tough decision choosing property over equities depending on your situation.

    A nominal 2% p.a then definitely no, not worth it because you've basically got no real growth.
     
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  16. berten

    berten Well-Known Member

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    Too many variables. 2% capital growth p.a? nominal? for how long? Is this leveraged? What LVR? What was the capital growth prior? (does it seem tapped out).

    For me generally, doesn't sound too enticing unless the acquisition served as part of a larger strategy.
     
    Last edited: 23rd Apr, 2020
  17. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I was just thinking there could be a prolonged period of low growth - on average. You can still leverage highly with property so it might still be an alright investment, but when you add up all the costs and land tax along the way there will come a level of capital growth which will mean you are better off not investing in property.

    not sure where the investment worthwhile point is though
     
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  18. iloveqld

    iloveqld Well-Known Member

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    It will be worthwhile when not many want to do that :D
     
  19. berten

    berten Well-Known Member

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    Yeahp, not worth it for me right now even accounting for leverage. 2% is okay as long I felt like there is a likelihood a sharp 15% or 20% boom on the horizon. But would probably need a decent fall in values from where they are, before i'd believe that. I'm more inclined to look at stocks right now.
     
  20. spoon

    spoon Well-Known Member

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    Yes, properties with low growth plus other expenses, land tax, maintenance, etc factored in., as well as less than ideal occupancy rate, then it is like a charitable act of letting someone living in your house and you pay for it.

    Of course you can claim taxes through negative gearing. But it is just like robbing the government to pay the tenants. Still is a good deed if viewed that way.

    But of course property investment is a long term game. At least it will not be like shares which a company can go down the tube and you only left with "wallpapers" as my Dad said. In the old days when you have share certificates...:(
     
    Last edited: 25th Apr, 2020
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