whats it worth?

[im sparticus]

If the risk free return on something atm is 4.75% ie if I want a $500 p/w income I would have to invest $547000

all things being equal what would the value of something that can a) maintain/increase its value by whatever inflation is running at (3-4%pa) and b) increase its yield by whatever infation is running at (3-4%pa) assuming this particular asset is currently yielding $500p/w

im assuming people would be prepared have this asset yield less than the cash rate, ie pay more for the privelage of growth in both aspects of its return. how much more and what do you think is fair?

 

[tobe]

Like rational man, or efficient markets, a 'risk free' return is economist hog wash. There is no risk free return. Cash in the bank risks being eroded by tax and inflation, and every other investment bears a risk.

Therefore an investment you describe, that keeps up with inflation in both capital and yeild without risk, would (theoretically, as above) be pretty much priceless......

If there were some risk to it, Im guessing the cost would be similar to a conservatively managed super fund, indexed share fund, or total average returns from residential property over the last 100/200/1000 years.....

 

[im sparticus]

Therefore an investment you describe, that keeps up with inflation in both capital and yeild without risk, would (theoretically, as above) be pretty much priceless......

QUOTE]

"priceless" i think youve overvalued that one. ie, what would somthing that did double the number (or triple for that matter) i discribed be worth (im guessing more than the former)?

 

[tobe]

Priceless, give me a risk free asset that generates capiltal gain and yeild, and Ill give you a perpetual motion machine that doubles the capital gains, and triples the price.

I was alluding to the fact there is no such thing, therefore price is irrelevant.

How much would you pay for a pig that could fly?

 

[Wunderbar]

The problem with your question is you are trying to maintain a rate of return each year - and that yield is based on the price you pay in the first place. The simple answer to your question is to divide the cashflow ($500 pw) by the required rate of return. In your case - this is 4.75% + 3% + 3% = 10.75%. This equals $241,860

 

[Cdro]

How much would you pay for a pig that could fly?

I'll buy your pig for $200. I've been using carrier pidgeons for my mail, but am finding that they really struggle with the larger packages. A flying pig could be just the thing. I am willing to pay more if the pig comes trained to deliver mail and find its way home again.

Sorry, couldn't resist.

 

[Dazz]

The simple answer to your question is to divide the cashflow ($500 pw) by the required rate of return. In your case - this is 4.75% + 3% + 3% = 10.75%. This equals $241,860

Nice succinct answer.

 

[tom32]

Wunderbar, you have taken the yield growth as additional yield. the 3% yield growth only means next year it will pay $515.00 etc not requiring an additional 3% yield and rather than reducing the required yield by the capital gain amount you have added it.

Anyway I think the answer to the OP question is as follows;

The risk free return at the moment is more like 6.5% not 4.5% so start there.

So base investment A) on this

To achieve $500.00 per week in a ubank deposit for example I would need 400k in it.

So a risk free investment yielding $500.00 a week is worth $400,000.00 if it is nearly 100% liquid (ubank is not entirely) and 100% safe (guaranteed by government, but as others say above inflation is eating this but this is considered the baseline risk free investment in most circles, a bank deposit, it is not in Zimbabwean dollars afterall).

Now compare that to the investment you have described.

Nett yield $500.00 per week 26k p.a.

Yield growth of 3.5% p.a.

capital growth of 3.5% p.a.

Yield growth is really going to have very little efect but lets say take it at 5 years out for rough enough calcs = $579.00 per week nett income.

Capital growth is 3.5% leaving you a shortfall of 3% over your risk free investment.

So assuming the link to inflation is indeed risk free and a 5year view on the yield is good, say a 10 year investment window then your $579.00 per week on a 3% yield is valued at; $866,000.00


[edit: the 3% requirement came from the risk free 6.5% minus inflation of 3.5%, i.e. 3% is the required shortfall the second investment must make up)

There are cleverer ways to look at the yield growth but they are more complex and not going to change the result by much...

the 866k is pretty close if you can guarantee risk free inflation growth and yield growth.

So two investment one tracking inflation with a nett yield of $500.00 today more over time is worth 866k the other not tracking inflation with $500.00 a week yield worth 400k. i.e. the one that tracks inflation as well as yielding $500.00 a week is worth more than the other one comparitively.

 

[tom32]

I should clarify you clearly have to relate nett yield to the yield in a bank account.

so a $500.00 nett is much more in gross terms for most investments. Others who have IP's can comment what is is for them, and I suspect it depends on how many you own and whether they are units or houses etc.

Own more than the land tax threshold and you really need some high yielding props to make it work. Suddenly 1% odd of your yield is eaten by the government assuming a 50% land v structure ratio and 2% land tax like in NSW. i.e. the 866k property above is worth a heck of a lot less to someone who has to pay a 2% land tax.

You also have less liquidity but on the plus side you can leverage big time into it.

 

[im sparticus]

interesting one person values it at 250k the other 866k. im assuming both would be prepared to buy and sell at there chosen price?

 

[tom32]

interesting one person values it at 250k the other 866k. im assuming both would be prepared to buy and sell at there chosen price?

I would prefer to buy it for 250k if I had the choice.

My assumptions were as per your example; $500.00 nett yield plus a link to inflation with the capital.

I would need it to be as liquid as a bank deposit also to be worth the full 866k which is not defined in the OP but even if it had similar liquidity to a house it would definitely be worth more than the bank deposit either way not the full 866k though.

In effect with the link to inflation you turn your $500.00 yield into a $500.00 yield plus a 15% increase in yield every year plus another near $500.00 per year in appreciation of the asset as per your OP. How is that going to be worth less than something yielding $500.00 with nothing else?

If you have one for sale I'll split the difference and give you 500k for it.

 

[im sparticus]

I would prefer to buy it for 250k if I had the choice.

My assumptions were as per your example; $500.00 nett yield plus a link to inflation with the capital.

I would need it to be as liquid as a bank deposit also to be worth the full 866k which is not defined in the OP but even if it had similar liquidity to a house it would definitely be worth more than the bank deposit either way not the full 866k though.

In effect with the link to inflation you turn your $500.00 yield into a $500.00 yield plus a 15% increase in yield every year plus another near $500.00 per year in appreciation of the asset as per your OP. How is that going to be worth less than something yielding $500.00 with nothing else?

If you have one for sale I'll split the difference and give you 500k for it.

wasnt knocking your evaluation I think its alot better than the 250k one that would be positively geared to the tune of $165p/w @100%lvr right off the bat. Me personally I wouldnt sell a growth asset for a price that allowed the buyer to be positively geared from the start and ide be happy to be negatively geared at first if i was the buyer, how much so is what i havnt decided maybe halfway between your 866 and 500k?