Investment Property vs Alternative Investment Calculator

[yieldmatters]

All,

Just a follow up to a previous discussion on another thread. I was talking about evaluating a property investment against your next best investment (i.e. including your opportunity cost in the evaluation).

My position is that with the very low rental yields then you must have capital gains to win out of property relative to just putting your cash in the bank. OR alternatively you need real rent prices to go up pretty fast so the rental yield comes good!

There is a link for a model at the bottom of this post. The model has 3 scenarios:

1) Putting money into an investment property
2) Putting the equivalent amount of money into another savings vehicle with similar risk (shares or something? up for debate what is equivalent)
3) Putting the equivalent amount of money into a risk free savings vehicle (term deposit)

You will see that they all make after tax money (positive return). But if you switch the capital gain assumption to be the same as inflation (2.8%) then scenario 2 and scenario 3 are the clear winner. This is because the rental yield (on market price) is less than your financing costs.

If there is anybody technical out there I would appreciate some feedback on the model - are there any errors or problems you see? The yellow cells are assumption cells and you can enter anything you like in there. Hopefully this is a useful model for some on the forum. Even those that have a strong view on further capital gains can get a benefit from it as you can see what type of money you can make and how quickly the property goes c/f positive.

It can be downloaded from here:

http://www.4shared.com/file/23105939/83956cea/investmentpropertycalculator.html

* This tool is an educational tool only - use it at your own risk and seek financial advice before making any committments!

 

[yieldmatters]

Version 2 of Calculator

I uploaded a version 2 that is labelled a little more clearly.

http://www.4shared.com/file/24782635/3f26c917/investmentpropertycalculator_Ver2.html

 

[Nullagine]

I uploaded a version 2 that is labelled a little more clearly.

http://www.4shared.com/file/24782635/3f26c917/investmentpropertycalculator_Ver2.html

Calcs look fair. Capital Growth / Yr looks crook. Bung in 7% per year and housing looks good, 4% and a bit sick, less than -1.66% and the IRR gives an error.

Overall I suggest you should add a comparison of wealth held in superannuation funds at the much lower super fund tax rates (a good comparison for at least for a few houses). When retired and over 60, the tax rates are 0%; before that 15% on earnings, 10% on capital gains. It may yet come to pass that super funds can borrow directly to buy rather than be forced to buy debt leveraged products like property trusts.

Appreciate your sharing for efforts.

 

[yieldmatters]

Version 3

Thanks Nullagine - Appreciate it.

Just did Ver 3. I added in a more realistic debt principle repayment schedule and some scope for other tax deductions. See this link if anybody is interested.

http://www.4shared.com/file/24785514/e5861de3/investmentpropertycalculator_Ver3.html

And yes Nullagine - with capital growth above inflation property is a winner even with a poor rental yield. Without CG above inflation it is actually a poor option. That was what I wanted to communicate.

Edit: Sort of contradicts my username doesn't it? (i.e. yield matters!)

 

[Bandita]

Hi yieldmatters,

Thanks for sharing!

Your purchase costs look too low - I guess it depends on the state, and whether it's an investment or not, but in VIC would be much higher.

The calc makes property look even more attactive to me

Cheers,
Jen

 

[yieldmatters]

Hi yieldmatters,

Thanks for sharing!

Your purchase costs look too low - I guess it depends on the state, and whether it's an investment or not, but in VIC would be much higher.

The calc makes property look even more attactive to me

Cheers,
Jen

Thanks. Glad it was useful!

I have a version 4 now - minor changes so need to download it. Just thought people might as well have the latest if they want to muck around with it.

http://www.4shared.com/file/24849113/29bc0f0/investmentpropertycalculator_Ver4.html

 

[Andrew_A]

I have had a quick look YM, I don't really understand your conclusions still or agree with them I think. Though I struggled with the scenarios you had. Could be a bit tired but I'm still trying to come up with a situation where you would be better off having money in the bank compared to buying an IP with leverage over any substantial period of time using any historic dataset for the variables, am open to learning though.

Ian Somers has done a much more detailed go of this with the PIA software, I think you can d/l the trial software and have a look.

 

[yieldmatters]

I have had a quick look YM, I don't really understand your conclusions still or agree with them I think. Though I struggled with the scenarios you had. Could be a bit tired but I'm still trying to come up with a situation where you would be better off having money in the bank compared to buying an IP with leverage over any substantial period of time using any historic dataset for the variables, am open to learning though.

Ian Somers has done a much more detailed go of this with the PIA software, I think you can d/l the trial software and have a look.

Thanks. I'll google it.

In the event of low property yields (low enough so that not even the tax benefits close the gap) and no capital gain then you are better off putting the equivalent amount of money in the bank. Somebody was trying to tell me that with very low yields and no capital gains you could still make money. You can make money but no better than a term deposit so effectively an economic loss.

Using historical capital gain assumptions it will tell you that property is an absolute winner. No doubt about that.

 

[BoatBoy]

Heres the title page

http://www.somersoft.com.au/

Demo version

http://www.somersoft.com.au/software/demos.htm

Support page

http://www.somersoft.com.au/pia/

Dave

 

[JIT]

You can make money but no better than a term deposit so effectively an economic loss.

No s**t!

You don't need a calculator to tell you this.

Negative gearing, has it's risks, the skill involves selecting a property that will have a high probability of capital gains in the medium to long-term.

And this is really not that difficult at all.

In a bearish market, your property selection skill just needs to be much greater. Eg. you could have bought almost any property in Melbourne in 2000 and you would have done well. Whereas, if you were buying in 2005, you would have had to be much more selective. If a property 'crash' is imminent, then even more so.

If you can't do this, don't have the belief, confidence, knowledge or skill, then residential property investing is probably never going to be for you.

I think you probably could have done it quite easily, going by your Taringa property purchase, but you're now far too paralysed by your own analysis and knowledge of macro-economics and complicated theories.

Oh well.

GSJ

PS: Everything you're harping on about could be an interesting topic for a Phd...but I doubt it will make you any money.

 

[yieldmatters]

I think you probably could have done it quite easily, going buy your Taringa property purchase, but you're now far too paralysed by your own analysis and knowledge of macro-economics and complicated theories.

ouch - is there a smilie for "slap across the face" ...

 

[Nullagine]

Oh well.

GSJ

PS: Everything you're harping on about could be an interesting topic for a Phd...but I doubt it will make you any money.

Some like a flutter, some don't. Those who are more towards the don't end like to weigh the odds. The more to the don't end, the more they weigh to the limit of their intelligence. More information processed more intelligently allows the risks to be weighed more exactly - but the reduction in decision making risk can be little better than the square root of the intelligence making the decisions, time taken or the amount of data used.

What the "Alternative Investment Calculator" does not do at all is weigh the odds.

If history provides us with means and variances in return of different asset classes, we can perform a Monte-Carlo simulation to best guess the likelihood of investing success.

In the case of financing retirement, success is having a high chance of not running out of money before you croak:

The Retirement Calculator from Hell

The Retirement Calculator From Hell - Part II

The Retirement Calculator from Hell, Part III: Eat, Drink, and Be Merry

Retirement Calculator from Hell, Part IV: A Nation of Wal-Mart Greeters

The Retirement Calculator From Hell, Part V: The Unhappy Implications of the Easterlin Hypothesis

 

[JIT]

Some like a flutter, some don't. Those who are more towards the don't end like to weigh the odds. The more to the don't end, the more they weigh to the limit of their intelligence. More information processed more intelligently allows the risks to be weighed more exactly - but the reduction in decision making risk can be little better than the square root of the intelligence making the decisions, time taken or the amount of data used.

What the "Alternative Investment Calculator" does not do at all is weigh the odds.

If history provides us with means and variances in return of different asset classes, we can perform a Monte-Carlo simulation to best guess the likelihood of investing success.

In the case of financing retirement, success is having a high chance of not running out of money before you croak:

Huh???

Although I haven't yet put anyone on my 'ignore' list, after this ripper of a post, I might have no choice...although, I must admit I have been skipping your posts when I've read through some recent threads anyway.

Gave me a laugh though, and I was almost going to give you kudos for it (being the silliest post I've read on SS in 3 years) - but I don't want to encourage that sort of posting.

GSJ

 

[yieldmatters]

Some like a flutter, some don't. Those who are more towards the don't end like to weigh the odds. The more to the don't end, the more they weigh to the limit of their intelligence. More information processed more intelligently allows the risks to be weighed more exactly - but the reduction in decision making risk can be little better than the square root of the intelligence making the decisions, time taken or the amount of data used.

What the "Alternative Investment Calculator" does not do at all is weigh the odds.

If history provides us with means and variances in return of different asset classes, we can perform a Monte-Carlo simulation to best guess the likelihood of investing success.

A little too poetic for me as well I'm afraid but I think I get the gist of it.

Agree with you in principle - hard to do in practice. I build Monte-Carlo simulations as part of my job. I think they work better for problems that are not spread out over time (e.g. stress points on metals under various conditions). Trouble is history provides means and variances but it doesn't provide anything particularly meaningful on the future direction! For example history might tell me that the $USD/ $AUD FX is on average 75 cents and the standard deviation is 5%. But it gives me no certainty on whether the FX rate will be $1 or $0.50 in 5 years time. The trouble with time series is everything else is changing at the same time - the past is in fact not a very reliable predictor of the future. If you haven't done so already I suggest anything by Nicholas Taleb - he is very entertaining on this (he was the guy with the turkey analogy).

Anyway that was a particularly geeky sidetrack which nobody else will be interested in but happy that you indulged me. At the very least it lends some insight as to why history doesn't give me a lot of comfort about the future!

 

[JIT]

Could all the academics, bookworms, nerds and geeks please start their own thread...maybe in the Coffee Lounge, and use a nice catchy title to generate some interest .

Thanks,

GSJ peace out.

 

[yieldmatters]

Could all the academics, bookworms, nerds and geeks please start their own thread...maybe in the Coffee Lounge, and use a nice catchy title to generate some interest .

Thanks,

GSJ peace out.

Hey - this is my thread!!! You are kicking me out of my own thread!??!!?

I started a geeky thread in the economics section as I think we agreed. Will still hang around here a bit but will be 'subtle' ... you never know - I might learn something.

 

[JIT]

Hey - this is my thread!!! You are kicking me out of my own thread!??!!?

I started a geeky thread in the economics section as I think we agreed. Will still hang around here a bit but will be 'subtle' ... you never know - I might learn something.

Oops, sorry YM, my mistake !!!

GSJ