All Topics / The Treasure Chest / Cashflow Verses Growth

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  • Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    Michael Yardley of Metropol Properties has an interesting comparision on cashflow/growth in his latest newsletter.

    Quote

    If you have any doubt about the importance of capital growth, the calculations in the table below may change your mind.
    Imagine you bought a property worth $300,000 in a poor growth area delivering 5% capital growth and 10% gross rental return; in 20 years your property will be worth $795,989.
    If you bought a different property for $300,000 in a high capital growth area showing 10% per annum capital growth and 5% rental return the property will be worth $2,018,250 at the end of the same period.

    In the meantime the rentals on this property will also grow substantially and slowly catch up to the rentals you would achieve on the first property.

    And the real bonus is you will be able to access the extra equity in this property and borrow against it, so that you can buy further investment properties. This is very difficult to do when you have a property with poor capital growth.

    10% capital growth 5% rental return on property value 5% capital growth 10% rental return on property value
    Year 1 $330,000 $16,500 $315,000 $31,500
    Year 5 $483,153 $24,158 $382,884 $38,288
    Year 10 $778,123 $38,906 $488,668 $48,867
    Year 15 $1,253,174 $62,659 $623,678 $62,368
    Year 20 $2,018,250 $100,913 $795,989 $79,599
    [/i]
    Unquote

    any comments?

    Terryw
    [email protected]

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    That table didn’t paste very well.

    The figures for High growth property are:
    10% capital 5% rental return Growth on property value
    Year 1 $330,000 $16,500
    Year 5 $483,153 $24,158
    Year 10 $778,123 $38,906
    Year 15 $1,253,174 $62,659
    Year 20 $2,018,250 $100,913

    The figures for cashflow property are:
    5% capital 10% rental return
    Growth on property value
    $315,000 $31,500
    $382,884 $38,288
    $488,668 $48,867
    $623,678 $62,368
    $795,989 $79,599

    Terryw
    [email protected]

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of kattankattan
    Member
    @kattan
    Join Date: 2003
    Post Count: 31

    Terry, I agree. cap growth is the key for long term strategies. while we may feel the pinch in the initial phase (CF-ve) the equity build up will provide us with the ammo to do more and yes the rents will catch up as prop value rises.

    Profile photo of crashycrashy
    Participant
    @crashy
    Join Date: 2003
    Post Count: 736

    ahhh if only it were realistic

    capital growth is not 10%, more like 7%.

    high rental yield can be 15%, not 10%.

    capital gains are a by-product of high yield. When yield is high, capital gains are inevitable. Just ask owners in Beenleigh & surrounding areas about their 70-100% capital gains this year. Capital growth is not a question of WHERE, but WHEN. Inner city always appreciates first, outer suburbs last.

    high yield is NOT a by-product of capital growth, in fact yield FALLS with capital growth.

    taxes, interest rates and inflation must be taken into account.

    I did my own spreadsheet (including taxes, interest rates and inflation) and found the opposite was true, which I posted here a few weeks ago.

    Profile photo of MJKMJK
    Member
    @mjk
    Join Date: 2003
    Post Count: 157

    By diversification you can have both cash flow and capital growth in the one portfolio, but I’m preaching to the converted I’m sure.
    My belief is it is a flawed stragegy to focus on cash flow alone.And visa versa. It may be worth stating that buying quality property is the best way to get capital growth rather than hoping regional areas are going to achieve significant capital growth it again or over the long term.I could be wrong?

    MJK

    Profile photo of MJKMJK
    Member
    @mjk
    Join Date: 2003
    Post Count: 157

    Crashy,

    Whilst I agree its very much a case off “when” its just as much a case of “where” when it comes to property. Its also just as much a case of planning, diversification & foresight.
    95% action 5% luck.

    MJK

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