Projecting capital gain and income

[Mush]

Hi all,
I am currently compiling a business plan and would like to include future projections,however my current calculations do not appear to be correct.For example,a property purchased at $520k in an area with historical capital growth of 10% over the last 10 years would result in future valuations of;$692k (3yr),$837k(5yr) and a whopping $1.349 million(10yr).
Likewise,rental projections calculated from a $420 a week base increase to;$559,$676 and$1089 using the same method.
Surely I am confused in my calculations.
Any advice would be much appreciated.

 

[Rixter]

Rule of 72.

Divide the Estimated CG or Yield (p/a) into 72 = Time (in years) to double.

ie. So using your IP example with a CG p/a of 10% = 72/10 = 7.2 years.

 

[Mush]

Thanks Rixter,anything more mathematical/official to present to financial institution or similar?
Been looking at linking to CPI but getting a tad confused.

 

[Rixter]

I use a Excel Worksheet... just remember that CG & yield is not a constant even growth year by year over a cycle.

 

[Mush]

Thanks again Rixter.
By calculating averages over a 7 year cycle I should produce accurate figures,the gains just appear to be extremely generous.....

 

[alexlee]

Thanks again Rixter.
By calculating averages over a 7 year cycle I should produce accurate figures,the gains just appear to be extremely generous.....

Because your growth rate of 10% is very generous. It CAN happen, but even if it did it would likely be followed by a couple of years of low growth. And you have to factor in inflation.

Though your current property of 520k would have had periods in the past when it was 260, 130, etc. 520k would have seemed like a lot to people back then.

 

[Mush]

So you feel that my calculations are correct alexlee?
I know that the 10% is generous but this is based on average historical growth over 10 years in my target suburb.
Where can I find historical rental increases to use for my projections,this has proved to be more difficult than I envisaged.

 

[alexlee]

So you feel that my calculations are correct alexlee?
I know that the 10% is generous but this is based on average historical growth over 10 years in my target suburb.
Where can I find historical rental increases to use for my projections,this has proved to be more difficult than I envisaged.

The calculation looks right. However, it would be optimistic to expect 10% of growth long term.

 

[Archer]

I think it would be dangerous to extrapolate the last 10 years growth out into the future. It is too short a time frame to take as the average growth and includes a period of time that has been unusually positive for property in the Perth market. If you factor in a 1 or 2% average gain above inflation you might have some more workable figures.

 

[MTR]

Personally I really don't see the point in these types of projections as its just guess work at best. Perhaps it just helps motivate, but I would rather keep it real and monitor performance each year.

 

[Mush]

I hear you Archer and have thought the same,however the historical growth figures are actuals taken from the index in the API magazine and there does not appear to be a better way to project than basing on what has happened historically.
MTR,it should not really be guess work if based on historical figures,and whilst it can be good for motivation surely it is quite important financially to be able to project these figures with reasonable accuracy.
As stated previously,with all the data available capital gain should be reasonably easy to project,however future rental income is tricky.

 

[tobe]

what sort of business plan are you putting together?

 

[Mush]

Can you be more specific tobe?

 

[tobe]

usually a business plan wouldnt involve capital growth rates for residential property.


What sort of a business are you writing a business plan for?

 

[Mush]

usually a business plan wouldnt involve capital growth rates for residential property.


What sort of a business are you writing a business plan for?

Fairly long winded,but yes accumulation of residential property including renovation aimed at a specific market which we aim to be both cash flow positive from day 1 and also capable of producing future capital gains with the ability to keep repeating.
At this point we have 6 scenarios and need to do our homework on each to enable us to decide on the best route to pursue.
We also wish to make each scenario as accurate as possible to enable our professional team to fully understand what we are trying to achieve thus enabling them to confidently advise.

 

[tobe]

I think most of your proffessionals looking at your business plan will discount/dismiss any projected capital gains anyway. Id suggest concentrating on yield and other variables rather than future capital gains.

 

[Mush]

So tobe that brings me back to the question of how to project future annual increases in rental income or yield?
What are the other "variables" you mention?

 

[MTR]

I think most of your proffessionals looking at your business plan will discount/dismiss any projected capital gains anyway. Id suggest concentrating on yield and other variables rather than future capital gains.

I would think this would be the case.

Also, historical data is also no guarantee whatsoever of future growth.
When you have been through at least 4-5 property boom/bust cycles you start to understand that there is much more to it.

 

[tobe]

you could get sworn valuations for increases in rental, and increases in capital gain, after a reno, not 'projected capital gain/rental'.

This would be about the best evidence. trouble is you need actual exisitng houses and actual fixed price construction plans to give a valuer. The valuer can then give a valuation and rental yeild 'on completion' of the renovation.

You might extrapolate these figures out a bit for similar houses in the suburb etc, but the more extrapolation you do, the more discounting a proffessional is going to attach.

 

[MTR]

Fairly long winded,but yes accumulation of residential property including renovation aimed at a specific market which we aim to be both cash flow positive from day 1 and also capable of producing future capital gains with the ability to keep repeating.
At this point we have 6 scenarios and need to do our homework on each to enable us to decide on the best route to pursue.
We also wish to make each scenario as accurate as possible to enable our professional team to fully understand what we are trying to achieve thus enabling them to confidently advise.

I am confused, so if your business model is basically renovating a property and it will be cash flow positive from day one on completion then I would have thought the most important aspect would be that at the end of each project there is xx profit is achieved and evidence is provided, either by a getting a valuation or selling the property and realising the profits. Rental income is easy to establish.

Am I missing something?

Why would you need stats on capital growth??