Good Growth ?

[Logan]

I am new to the IP game and just wondering how others define good capital growth ?

If you are chasing capital growth would 5% be a good mark or over 10 % ?

I understand in regional areas with higher yields around 2 % would be 'average' or am I way off ?

I still strategising and running numbers trying to plot my way forward !

 

[Kinnon Bell]

How long is a piece of string...?

Too many variables at play to give a definitive answer.

Some would consider keeping up with CPI good growth if there were other factors at play to make up for the lack of CG whereas some would consider anything less than 10% to be a poor investment.

There a lot more things to chase to make a good investment than just purely capital growth.

 

[Redom]

I am new to the IP game and just wondering how others define good capital growth ?

If you are chasing capital growth would 5% be a good mark or over 10 % ?

I understand in regional areas with higher yields around 2 % would be 'average' or am I way off ?

I still strategising and running numbers trying to plot my way forward !

Depends. Keep strategizing and formulating. Start with an end goal and map out how to get there. Cap growth assumptions will definitely feed into it - then search for properties that exhibit fundamentals that you think will deliver those returns.

Generally speaking, if i hit 10% p.a. cap growth for the next decade i'm celebrating...and probably retiring!

4-5% is a very good benchmark over a long horizon for me.

Don't buy into previous 10-30 growth figures as a guide for next period - basic economics tells you that this is unlikely in a macro-economic context. May find great results in certain micro-markets though.

Cheers,
Redom

 

[Logan]

Thank for the replies, I am trying to project going from my first IP to number 10. All the books I have read talk about going for growth to gain equity for the next purchase but none define what is 'good' growth. My only experience so far is with my PPOR which has hit 5-6% each year. I would buy more houses in my area but I would use up almost all my equity on one purchase.

On the same topic, if you had $200,000 equity to start with would it be better to use it all at once with 3 concurrent purchases (in different areas) or just one each year ? I can't see the point in waiting and my serviability should be fine with a combine income over $170k ?

 

[Jess Peletier]

On the same topic, if you had $200,000 equity to start with would it be better to use it all at once with 3 concurrent purchases (in different areas) or just one each year ? I can't see the point in waiting and my serviability should be fine with a combine income over $170k ?

Rather than deciding that now, remain flexible. If you find 3 properties that meet your goals today, by all means buy them but don't rush just because you can.

 

[Redom]

Thank for the replies, I am trying to project going from my first IP to number 10. All the books I have read talk about going for growth to gain equity for the next purchase but none define what is 'good' growth. My only experience so far is with my PPOR which has hit 5-6% each year. I would buy more houses in my area but I would use up almost all my equity on one purchase.

On the same topic, if you had $200,000 equity to start with would it be better to use it all at once with 3 concurrent purchases (in different areas) or just one each year ? I can't see the point in waiting and my serviability should be fine with a combine income over $170k ?

Depends on your plan. If you're aiming for healthy capital gain properties, than put that cash into 3 properties. Get 90% lends and leverage up.

If you have 2 million in assets working for you at 5-6% capital growth, in ten years time, they'd have doubled in value and you'll be sitting pretty with 2 mill in equity. Of course, you'd be able to withdraw this out earlier and go again and again (pending serviceability).

Set your goals out and what you want to do, then talk to a bank/broker and build a finance plan to map out how you can get from 1, to 4, and beyond - in line with your goals.

Cheers,
Redom

 

[jacbmw]

I understand in regional areas with higher yields around 2 % would be 'average' or am I way off ?

Not necessarily the case - lots of evidence for the 10 years just gone, that regional has outperformed our capital cities.

Also the majority of suburbs coming into 2015 that have excellent market buy signals are regional.

Furthermore, it should also be noted, that short-medium term high capital growth in a regional area is due to localised demand/supply imbalance. Once this has been satisfied through perhaps the short-medium term, capital growth may under-perform (for the remainder of your 10 year plan).

 

[Logan]

Sorry guys just to be clear I was talking about per annum in terms of good growth rather than over a 10 year period. I am interested in initial growth to expand (my current dream portfolio) and pull equity out. I understand that the cycle will move on and later gains will be lower. Is it possible to get 10% in a year for a growth area or should I be calculating something lower 5-6% ?

 

[Redom]

5-6% is generally a good average per annum growth rate. You'd be doing well if you achieve this over the next decade (without doing work to the property).

 

[Logan]

5-6% is generally a good average per annum growth rate. You'd be doing well if you achieve this over the next decade (without doing work to the property).

Thanks Redom !

 

[jerryparker]

annual capital growth is volitile however long term capital growth is secur

Real Estate has periods of high capital capital growth, even double digit, then they slow down and even become negative during recessionary times. Some say the cycles are every 7 years.

10 years capgrowth can look like this:

12%, 8%, 5%, 2%, 2%, 3%, 3%, 2%,8%, 8%

the average growth rate above is 5.3%. The national 30 year average is over 7%.

In our example prices would have been typically highest in year 4

So if you bought in year 4 your average capgrowth for the remaining 6 years would have been 4%

I guess the point I am trying to make is that annual capgrowth is very volitle.

Rather than just rely on the capital growth of an area, you can create value just by purchasing strategically


Ways to get early capital growth:

• Buy early off the plan
• Build house and land
• follow infrastructure growth and buy before its completed
• mortgage sales
• worst house in the best street

Getting an early capital gain or equity growth sets you up to build safety buffers to help avoid being forced to sell in a down market. this is key from those partnering with banks in order to increase their overall returns with the relatively cheap bank money at the moment.

Create an early capital gain for your purchase don't just aim for the average return of an area, look at the 10 year historical return of that area and see how volatile it is.

By purchasing strategically you can create an early double digit equity growth.

 

[Logan]

Getting an early capital gain or equity growth sets you up to build safety buffers to help avoid being forced to sell in a down market. this is key from those partnering with banks in order to increase their overall returns with the relatively cheap bank money at the moment.

Create an early capital gain for your purchase don't just aim for the average return of an area, look at the 10 year historical return of that area and see how volatile it is.

By purchasing strategically you can create an early double digit equity growth.[/QUOTE]

Thanks Jerry that is exactly what I am aiming for - timing the market to get the early growth, not so concerned about it slowing down later on (as long as it does plummet too far into negative!).

From what I have read here and and magazines it looks like SE QLD is the current growth area ?

 

[The Y-man]

I still strategising and running numbers trying to plot my way forward !

Logan,

It might be easier to reverse the thinking.

i.e. Given the interest rates, holding costs, rental income, (and inflation if you are really into it), what CG do you need to make the investment work?

The Y-man

 

[knightm]

Some good responses above.

I tend to think about total returns over time moreso than just CG. The below graph shows long term (almost 100yrs) average total return for Au shares and property. If you outperform that you are doing ok I reckon. By how much depends on developing either an active value add system or a technical analysis system to out trade the market.

Jan somers discusses the above concepts in one of her early books and compares regional with capital city properties. She ran some models and showed that either can build wealth long term if the total returns are similar over time.

To build a portfolio you need to balance your LVR with your DSR. To make each next purchase you need both deposit money and serviceability. In my thinking a balance of growth properties and yield properties makes sense and reduces risk.

 

[Logan]

Logan,

It might be easier to reverse the thinking.

i.e. Given the interest rates, holding costs, rental income, (and inflation if you are really into it), what CG do you need to make the investment work?

The Y-man

Thanks Y man. I guess at this stage I am trying to determine how speculative I should be in purchases rather going for low consistent growth. I am pretty sure I can pick low growth suburbs (2-3%) myself but I am thinking of engaging assistance to chase high early growth.

 

[knightm]

Thanks Y man. I guess at this stage I am trying to determine how speculative I should be in purchases rather going for low consistent growth. I am pretty sure I can pick low growth suburbs (2-3%) myself but I am thinking of engaging assistance to chase high early growth.

You should definitely be expecting better than 2-3%!

 

[The Y-man]

Thanks Y man. I guess at this stage I am trying to determine how speculative I should be in purchases rather going for low consistent growth. I am pretty sure I can pick low growth suburbs (2-3%) myself but I am thinking of engaging assistance to chase high early growth.

We used to buy the suburb median price data for the past ten years and try to extrapolate patterns,

These days, in Victoria, you get it for free!
http://www.dtpli.vic.gov.au/__data/assets/pdf_file/0018/222084/AGuidetoPropertyValues2013.pdf

The Y-man

 

[albanga]

Have you considered manufacturing growth as opposed to waiting for the market to do the heavy lifting for you?
With 200k equity you could purchase a splitter block and subdivide and sell the rear or if your game develop it with a duplex to kick things off.

If the market moves upwards whilst your getting DA or developing then you get a double bonus.
I bought my PPOR at the bottom of the market for 586 3 years ago and got DA approval for a dwelling at the rear. Values (market only from 3 seperate REAs) is 520-550 for the house/front block and 300k for just the land of the back block.
So around a potential 260k profit (not including other costs for this example) This is a combination of doing the work to get DA and also the market moving in my favour. If the market had not moved in the 3 years I would still have a higher value of the 2 seperate properties though which would allow me to go again as opposed to a standard buy and hold which would only have the equity you paid if you were P&I.

 

[Logan]

A duplex would be ideal but I am too green at this point (or at least my partner thinks I am). I considered a granny flat on my PPOR but the block isn't favourable.

Interesting thought for a splitter block - I might look into it - thanks !

 

[jerryparker]

Logan,

Two areas that are experiencing excellent double digit secure growth due to infrastructure growth are Sunshine Coast and Toowoomba.

These are not speculative areas but have established centres with schools, Universities hospitals, transport corridors. Both area are getting large new public and private infrastructure projects that are changing the income demographics of the area, jobs higher than the average wages of the area which allows for increase rental rates.

Start researching and you will know what I am talking about.

Jerry Parker