Yield vs Capital growth

W

WebBoard

Guest
From: SJ Softie


As pointed out by GoAnna the Melbourne property market is booming. I am a novice and am currently trying to buy my first IP in Melbourne but the areas I am researching the price of property is increasing faster than rental return. Therefore, the rental yield is 4-5%. Is it unwise to purchase a property that is not self sustaining under the guise of capital growth, hence, gambling on whether the current market growth will continue? Or is it wiser to look in other areas where the sums are safer and aim for positive gearing and potentially less capital growth?

Interested in your thoughts of what should be my priorities when assessing what is a good IP. (I am in the financial position where I am able to contribute to the loan even though I would prefer not to).

Thanks,

SJ
 
Last edited by a moderator:
W

WebBoard

Guest
Reply: 1
From: G G


only my opinion, if prices are galloping along, it tells me that there's a sort of herd mentality where every man & his dog's jumping on the bandwagon. Buying at inflated prices in the hope of achieving even higher prices down the track is highly risky.
Better to go for reasonable prices with good rental returns which can support the loan, pay off the loan & enjoy living off the rents!
cheers
 
Last edited by a moderator:
Reply: 1.1
From: GoAnna !


The mil$ question is are the prices inflated or still catching up after flat period in early to mid 90s?

Wish I knew the answer to that one!

GoAnna !
(aka Anna before she got real)
 
Last edited by a moderator:
Reply: 1.1.1
From: Apprentice Millionaire


One of the problems I have with capital growth is basing a prediction on past performance. My experience in the share market (I am a buy and hold shareholder, not a trader), shows that past performance often has no relation at all with future performance. Take Pacific Dunlop! Glad I got out in time!

So taking that lesson into my learning process in the IP market, I would tend to go for the good rental yield, looking for a mild capital growth (and hoping for a decent capital growth!). Because although I understand I need capital growth to help me get other IPs, I know that a good capital growth with a poor rental yield would be detrimental to my budget and cashflow.

Mind you, I am still looking for that elusive high capital growth and high rental yield IP. If I haven't found it yet, it's probably because I am still learning! :)

Cheers
Apprentice Millionaire
(aka Jacques in the old forum)
 
Last edited by a moderator:
Reply: 1.1.1.1
From: GoAnna !


Hi AM

I think there are some big differences between the share market and the property market.

The property market is less volatile because most of the people who own houses are not investors - they are home owners and when the going gets tough they cling tight to their houses. From the little research I have done the 3 weaker areas in economic low times are investment type houses such as apartments, the top end of the market and the houses in areas most effected by job losses.

To practically guarantee growth in Melbourne I would buy a median priced house in either the prime south eastern, bay, or trendy inner city suburbs. These areas have enjoyed excellent growth for decades and unless there was some huge social or environmental changes I can't imagine why it won't keep on growing.

To pick an emerging area is a little more tricky although if the suburb next to it has already moved and it shares the same characteristics you would be pretty safe here as well.

I look forward to the debate.

GoAnna !
(aka Anna before she got real)
 
Last edited by a moderator:
Reply: 1.1.1.1.1
From: Apprentice Millionaire


Hi Anna!

>I look forward to the debate.

Debate? I would rather listen to you all day and learn from you! :)

You are right, there are major differences between the share market and the IP market, the big one being volatility. My allusion to the sharemarket was just on the point that past performance does not guarantee future performance, and I assume that is still correct for the IP market.

I guess my concern is my budget: I operate on a strict budget control, and if I borrow, want to make sure that my cashflow will not be affected. Hence my leaning towards better yield. And my learning curve involves listening to experienced people on this forum and elsewhere to find out where capital growth may occur or be occurring.

I also am putting a lot of effort in knowing my area like the back of my hand, so that I can spot a great deal when I see one. That means I do not have to worry about being in the right area, in particular as the time I can devote to searching other areas, such as the ones you have mentioned, is very limited indeed!

Cheers
Apprentice Millionaire
(aka Jacques in the old forum)
 
Last edited by a moderator:
W

WebBoard

Guest
Reply: 1.1.1.1.1.1
From: Kevin Forster


Yield is a prime requisite for us. We always make sure that the property will pay for all outgoings and still have money left over. The biggest reason is that we are a single income family so there fore my wife holds all the properties and earns the income from them therefore the tax in minimal.

Melbourne is experiencing a boom at the moment and some areas more than others. If the worm turns then some areas are going to be affected greater than others. Often median priced houses are affected too as who can afford the rents on the dole.

The big con I have using capital gain as a prime requisite is eventually you end up having to buy for yield. Otherwise how do you create CASHFLOW.

Robert Kiyosaki spells it out quite succinctly and every wrapper out there know that this is what it's about.
 
Last edited by a moderator:
W

WebBoard

Guest
Reply: 1.1.1.1.1.1.1
From: Lewis O'Brien


A couple of interesting facts from he who endured an MBA:

Firstly, the property market would appear to be, at least in one study I saw, about as volatile (and hence risky) as shares. The problem is that each property is unique and rarely traded, hence forming an index, like those used to measure shares, is very hard. This also makes it hard to measure the riskiness of property directly.

(On the flip side - the banks haven't worked out that property goes down as well as up and hence you don't face the equivalent of margin calls.)

Secondly, share investing is almost identical to property investing in a pure sense. You invest a dollar of your hard earned capital in search of a return. Shares have (on average) a lower dividend yield and a higher capital gain. Property tends to have a higher yield and relatively lower capital gain.

However, what all of us are looking for is TOTAL RETURN. Most share investors don't care whether they receive income or capital gains (ignoring tax issues) as long as they get their total return. The presence of charlatans and unscrupulous share brokers promising huge capital gains (the dot com mania) hasn't; deterred most sensible investors from investing in shares for capital gains.

I therefore ask why the over blown promises of some greedy marketers and over zealous estate agents (who promise capital gains that don't materialise) would convince many property investors that income is more important than capital growth when the real object is total return?

Lewis O'Brien
 
Last edited by a moderator:
Reply: 1.1.1.1.1.1.1.1
From: Rolf Latham


Hi Lewis

I normally dont comment on this OR that things re property and shares, however two points.

WHen the share market goes to custard properly, as eventually it will, there will only be very few corporate survivors. Hence most direct investors and managed funds will be holding worthless paper. This includes all those safe super funds too.

Now it is true that in those economic conditions your property is not worth a brazz razoo either, but later the intrinsic value of property (like gold) will soon return and there agian is your asset. The shares you burnt for warmth on the other hand .........

Balance perhaps ?

Ta

Rolf
 
Last edited by a moderator:
Reply: 1.1.1.1.1.1.1.1.1
From: Felicity W.


Hi Rolf!
I love both property and shares, for different reasons.
Property because if I buy the right property it will sit there and tick over very nicely for me with very little effort, hopefully accumulating growth and income.
Shares I like because I can do stuff with them! Plus I always like to have a certain amount of money that I can get to in a hurry, and shares are perfect for that.
By the way, Rolf, have you heard of put options or put warrants? Careful use of these can mean you don't lose a packet in a major downturn on the sharemarket.
Keep smiling
Felicity :cool:
 
Last edited by a moderator:
Reply: 1.1.1.1.1.1.1.2
From: Apprentice Millionaire


Hi Lewis,

>However, what all of us are looking for is TOTAL RETURN.
>Most share investors don't care whether they receive
>income or capital gains (ignoring tax issues) as long
>as they get their total return.

You make some good points, and you are probably right. I can see that capital gains will give me extra equity to buy further IPs, but if my yield is poor and my cashflow is negative, then it will impact my ability to service the loans on these further IPs. Hence my preference for a higher yield. So I do care about the income (cashflow) side of things.

Cheers
Apprentice Millionaire
(aka Jacques in the old forum)
 
Last edited by a moderator:
Reply: 1.1.1.1.1.1.1.1.2
From: Apprentice Millionaire


Hi Rolf

>WHen the share market goes to custard properly, as
>eventually it will, there will only be very few corporate
>survivors. Hence most direct investors and managed funds
>will be holding worthless paper.

Without getting too deep into the debate of shares versus property, I would beg to differ: both markets will suffer downfalls and recoveries. If one has not sold at a loss in a downfall, then all one has is a paper loss. And all one needs to do is wait for the recovery.

>Now it is true that in those economic conditions your
>property is not worth a brazz razoo either, but later the
>intrinsic value of property (like gold) will soon return
>and there agian is your asset.

Behind a share there is a company. If I invest in quality companies, then the intrinsic value of the company will return. For example, I have shares in NAB and CBA. In a sharemarket crash, the value of the shares will drop, but the companies do not go belly up for that reason.

Cheers
Apprentice Millionaire
(aka Jacques in the old forum)
 
Last edited by a moderator:
Reply: 1.1.1.1.1.1.1.1.2.1
From: GoAnna !


Hi AM

I was just thinking...when you buy shares to you make sure that they are cash flow positive? In that the dividends cover interest repayments? Do you borrow 100% plus costs.

I was just wondering if we have different expectations of shares and property?

GoAnna !
(aka Anna before she got real)
 
Last edited by a moderator:
Reply: 1.1.1.1.1.1.1.1.2.1.1
From: Apprentice Millionaire


Hi Anna,

I have not borrowed 100% plus costs for my shares. Hence they are cashflow positive. But I have huge capital gains. With my one IP, I have a cashflow positive situation, but moderate capital gain expectations.

We do have different expectations of shares and property, but in both cases, I make sure the investment does not affect my cashflow (sounds like a leitmotiv!) Most of my shares have been bought at a float (CBA, TLS one, COH, CSL: check the capital gains!) With shares, I will crystallise my gains and purchase others at float. With property, I guess I will adopt a buy and hold strategy (I am still working out what my strategy needs to be!)

In both cases, I believe in (and strive to achieve) buying well: someone said, and I cannot remember who, that the profit is made at purchase time, not at sale time.

Cheers
Apprentice Millionaire
(aka Jacques in the old forum)
 
Last edited by a moderator:
W

WebBoard

Guest
Reply: 1.1.1.1.1.1.1.1.1.1
From: Steve G


Hi Guys!

I agree with Felicity's comments, and would add that call options can also produce a nice income if used properly.

But in my book, Rolf hit the nail on the head with his final comment about "balance"! I think its not about "exclusively shares" or "exclusively property", but obtaining a mutually supporting balance that allows you financially support what you want to do in life.
 
Last edited by a moderator:
Reply: 1.1.1.1.1.1.1.1.1.1.1
From: Felicity W.


Hi Steve
Yes, I'm currently writing naked call options and doing very nicely so far.
We've hit the point where we're borrowed up to 80% and serviceability is a bit dodgy, plus I have a little baby, so the whole IP thing is on the backburner.
In the meantime I'm "working from home" on the options trading to help build up some more funds - and eventually put us in a position to continue with the IP portfolio.
I think I've already said it, but that's why I like both property and shares - I have different objectives at different times. Sometimes I want to build wealth assets, and I use IP for that. Sometimes I want extra income, and I use options trading for that.
So much fun!!!
Keep smiling
Felicity :cool:
 
Last edited by a moderator:
Reply: 1.1.1.1.1.1.1.1.1.2
From: Rolf Latham


Hi Felicity

Yes I have heard of warrants did some stuff with SG a little while back.

Still comes down to intrinsic value of an item really though does it not ?

You may be able to protect yourself with a stop loss and put options, at the end of the day though, someone loses out very badly - forever, not just a paper loss.

All in good balance, nothing wrong with securities (I used to sell them !) in a cocktail.

ta

Rolf
 
Last edited by a moderator:
Reply: 1.1.1.1.1.1.1.1.2.2
From: Rolf Latham


Hi Am

I know I should not have started on this :0(

How many companies that started on the market in 1920 are still there in their original or pheonix or metamorphosed form ?

How many properties that were owned in 1920 are still worth something today ?

Yep, good solid average performing stock will help you to minimise losses in a full on spiral I agree with you ! However that is not the stuff that most ma and pa investors are margin lending on is it ?

Balance of some sort? Borrow for property and blueblue chips, use spare cash for anything else.



Ta

Rolf
 
Last edited by a moderator:
Reply: 1.1.1.1.1.1.1.1.2.3
From: Rolf Latham


Hi Am

I know I should not have started on this :0(

How many companies that started on the market in 1920 are still there in their original or pheonix or metamorphosed form ?

How many properties that were owned in 1920 are still worth something today ?

Yep, good solid average performing stock will help you to minimise losses in a full on spiral I agree with you ! However that is not the stuff that most ma and pa investors are margin lending on is it ?

Balance of some sort? Borrow for property and blueblue chips, use spare cash for anything else.



Ta

Rolf
 
Last edited by a moderator:
W

WebBoard

Guest
Reply: 1.1.1.1.1.1.1.1.1.1.1.1
From: Steve G


Great, Felicity!

We're doing a similar thing, and finding it works pretty well.

Hang in there!
 
Last edited by a moderator:
Top