Routes to prop­erty gain

The Weekend Post - Real Estate - - Real Estate - PETER KOULIZOS

ONE of the big­gest ques­tions in real es­tate is whether it is best to in­vest for rental re­turn or cap­i­tal growth.

A prop­erty in­vestor ob­vi­ously needs rent to help pay ex­penses, but in my opin­ion in­vestors are bet­ter to fo­cus on cap­i­tal growth than rental re­turn.

Let me ex­plain with an ex­am­ple. Let’s imag­ine there are two prop­erty in­vestors: Jack and Jill.

Jack bought his first in­vest­ment in 2000 for $200,000. It was a new town­house on a small block of land in a new es­tate of an outer sub­urb in a ma­jor cap­i­tal city.

As the prop­erty was new, Jack was able to gain a pre­mium rent and was col­lect­ing $220 a week.

Jill also bought her first prop­erty in 2000 for $200,000. It was a small, pe­riod-style prop­erty on a rea­son­able block of land in an up- and- com­ing sub­urb in a ma­jor cap­i­tal city.

Her prop­erty was not new so she could not charge a pre­mium rent, but due to its prox­im­ity to the city she was still able to charge $200 a week. Jack was at­tracted by the new prop­erty and rel­a­tively high rent, while Jill was fo­cused on the lo­ca­tion and the po­ten­tial for above-av­er­age cap­i­tal growth. Fast track to 2015. Let’s as­sume that Jack was able to con­sis­tently get an ad­di­tional $20 a week in rent over each of the past 15 years.

This is an ex­tra $ 1040 per year or a to­tal of $15,600 in rent. So, Jack is in front with the rent.

What about the cap­i­tal growth?

In the past 15 years, prop­erty prices have al­most tripled in most Aus­tralian cap­i­tal cities.

This means they have in­creased at a rate of about 7 per cent a year (which is about the av­er­age an­nual in­crease over the past 70 years).

As cap­i­tal growth is based on lo­ca­tion, land and the prop­erty’s ap­pear­ance, Jill’s prop­erty should have greater cap­i­tal growth than Jack’s be­cause her prop­erty is closer to the city, is on a larger block of land and is a pe­riod-style home.

Let’s as­sume that Jack’s prop­erty in­creased at 1 per cent less than the long-term av­er­age, at 6 per cent a year.

Let’s also as­sume that Jill’s prop­erty in­creased at 1 per cent more than the long-term av­er­age, at 8 per cent a year. That would make Jack’s prop­erty now worth $480,000. He has made a rea­son­able cap­i­tal gain, as it is worth much more than he paid for it.

How­ever, Jill’s prop­erty is now worth $630,000. Her prop­erty is worth $ 150,000 more than Jack’s.

Why? Jill fo­cused on cap­i­tal growth whereas Jack fo­cused on rental re­turn.

We all need rent to pay the bills, but the big­gest profit is in the cap­i­tal growth. – Prop­erty lec­turer and au­thor Peter Koulizos runs the­p­rop­er­typro­fes­

BURN­ING QUES­TION: In­vestors can gain more from cap­i­tal growth than rental re­turn.

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