澳洲Australia property Portfolio Performance | Sydney


在澳大利亚 I need some advice regarding a property purchase. Property - semi-detached house Bedrooms - 2 Condition - average needs internal reno to modernise Street - one of the best in suburb Location - excellent Close to schools - yes Transport - 50m The pool at of an IP needs to be resurfaced (or so the pool doctor says), the cost was estimated to be $10K ($10,000), after recoverying from my impresssion of a cat coughing up a fur ball, it just seems far too much. Its just a standard poo


Hi all,

Given you have done you homework correctly and have secured an IP in an area which will hopefully give you a good CG. You would expect 10%+

However, this will obviously not last forever and as a B&H investor you need your overall portfolio to be returning a good CG each year. At least to continue holding.

So, what would be a reasonable minumum average CG across a typical portfolio be once the smoke settles?

7% or 8%

Would that be an unreasonable expectation across the portfolio as a minimum?

3M  

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Property doesn't go up by a certain % each year.....it varies even if your portfolio of properties is AAA. Sometimes it may be up 20%, others it might be down 5%+. You just have to take a long-term view that over time your investment is yields you a good return, which for me would be at least 10-15% p.a on average  

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MMM said: ↑
So, what would be a reasonable minumum average CG across a typical portfolio be once the smoke settles?Click to expand...
It has nothing to do with the smoke settling. The average, over a full cycle, has to include everything that happens in life - boom, bust, strong economy, weak economy, GFC, etc.


MMM said: ↑
7% or 8%.....Would that be an unreasonable expectation across the portfolio as a minimum? 3MClick to expand...
No, that's not unreasonable and gives that 'doubles every 10 years' outcome.

Of course some areas out-perform while others under-perform the norm. But for the purpose of your calculations (I assume you are up to your eyeballs in Excel spreadsheets :)), then this would be safe to assume I think.  

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MMM, it seems a cop out to tell you it depends. My portfolio doubled in 5 years, but some may say that was due to the economic climate of the time and not to the 700 plus properties I looked at and the research I did.

In this months API mag Shane Oliver AMP Chief Economist looks at property since 1926 delivering a 11.4%pa return. If you changed the timeframe the return would change. BIS Shrapnel one of the more negative predictors are looking on average 3-5%pa for capital cities.

When you are trying to work out the game plan you need to use some number, I know, so work out what you are comfortable the 7%pa since 1901 the 11.4% since 1926 or the house price median over the last 20yrs according to Residex ie 7.22%.

Once you know your goal ie I want a passive income of $50kpa in 15 years, your strategy ie I will buy reno and hold, your buying criteria ie the property has to be below $350,000 returning 5% rental yield after a reno that cost 10% of the value in an area with past capital growth of 7%pa next to a suburb with a higher median price and a past capital growth of over 9%pa and obviously with reno potential. Only then can you really with any confidence planning how long it will take for you to get to your goal.

Here is a tip that you won't here anywhere else, when doing your spreadsheet once your properties get to the $800k mark in todays dollars factor in the rental return dropping to 3-3.5%.

I hope this helps you.
Jane  

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Hi all,

Thanks for the insights.

I have created a spreadsheet in an attempt to formulate a 'what if' model and begin to see the effects of building a portfolio based on a number of assumptions.

I can toggle things like ; interest rates, purchase costs, holding costs, purchase price, purchase frequency, rental yield, rental increase and of course preferred capital gain.

this model has shown me, to reach my particular goal from the position I am starting from and in the time I have available the minumum average capital gain across the portfolio would need to be about 8% per year.

This is minumum average so it takes into account properties that will not perform as well as other for any particular year.

If this is an unrealistic expectation for a residential property portfolio then I may as well start looking at other ways to help me get me to my goal.

3M  

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That is a great start - looking at those doing predictions getting 8%pa may be difficult in capital cities but you can get ahead of the game by buying below the market, and creating equity and a higher rental yield by renovating - however the key to wealth ie the underlying capital growth will be based on you finding an area that people want to live in that they drive up the prices ie hence lower supply.

If your goal timeframe is short-term (not recommended for any property investor), then you might cash in on the mining boom over the next 3 years. If it is long term then follow the infrastructure that is opening up areas and making previously unpopular areas popular. ie like the road infrastructure did for Mt Barker SA between the 2001 - 2006 census - the population went mad - guess what happened to house prices?

Hope this helps
Jane Slack-Smith  

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Here's some numbers for thought. Let's take BIS's prediction of 3% over the next 20 years.

Now let's say the property is neutrally geared after all expenses assuming you borrow 80% (just enough to sneak in under LMI). I've excluded all other transaction costs to simplify the analysis, but it will have marginal impact any way.

Time 0:
Investment/Initial Equity: $1m
Debt: $4.0m
Portfolio of $5m

Time t+20:
Portfolio: $9.03m
Debt: $4.0m
Final Equity:$5.0m

CAGR: 8.4% pa over 20 years

Let's say we increase our growth to 5% pa, our CAGR over 20 years becomes 11.8% pa. Obviously at Year 10 you'd assume rental has caught up, potentially pushing property at 15% pa CAGR.

So in short, based on BIS Shrapnel's bearish predictions, you should expect to make ~15% pa over a 20 year time frame at 80% gearing.

Just some food for thought. It's just numbers at the end of the day and you can change whatever assumptions to suit your argument.  

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My modelling shows me, to reach my 10 year goal of living of my equity to the tune of 100K/year I will need a portfolio value of about 6-7M.

This equates to about 5-6 IPs including PPOR.

This equates to purchasing an IP roughly every 2 years.

In order to hold the IPs purchased and to grow the necessary buying costs of the next this will mean an 8% CG minimum avaerage across the portfolio per year.

Assumptions
- 9% avaerage interest rate (across mortgages and buffer account)
- 2% administration costs
- 4% rental yield
- 2% annual increase in rents
- IP purchase of about $375000
- 33% purchase costs (20% deposit, stat fees, DD fees, including BA fees)
- Full tax deductability
- 80 - 90% of CG is re-invested.
- negative geard properties serviced by capitilisation (buffer LOC account)

I am a green beginner so all this could be completly incorrect.

3M  

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OK, your "assumptions" are 'reasonable' and OK for modelling scenarios IMO, (apart from rental increases).
Your modelling will be wrong for 2% rental increases pa. If rental yields, in your assumptions, are to stay around 4% pa, then rents must rise at the same pace as CG to maintain the same rental yield.

HOWEVER, in relation to CG, sometimes 'stupid reality' kicks in. It is quite possible in your 10 year plan to have many years of low/no growth. For example look at the CG chart for Marrickville attached. From 1992 - 1997 - not much of anything. This was repeated in most of Sydney from 2003 - 2008. So you need to 'hang on' through these times and not get disheartened an sell, only to miss out on the next growth spurt.

In fact, RE CG behaves much of the time, as you see in the chart, from 2004 onwards. Long flat periods, followed by a quick growth spurt of 2 years, followed by a long flat period......and so on.  

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MMM said: ↑
My modelling shows me, to reach my 10 year goal of living of my equity to the tune of 100K/year I will need a portfolio value of about 6-7M.

This equates to about 5-6 IPs including PPOR.

This equates to purchasing an IP roughly every 2 years.

In order to hold the IPs purchased and to grow the necessary buying costs of the next this will mean an 8% CG minimum avaerage across the portfolio per year.

Assumptions
- 9% avaerage interest rate (across mortgages and buffer account)
- 2% administration costs
- 4% rental yield
- 2% annual increase in rents
- IP purchase of about $375000
- 33% purchase costs (20% deposit, stat fees, DD fees, including BA fees)
- Full tax deductability
- 80 - 90% of CG is re-invested.
- negative geard properties serviced by capitilisation (buffer LOC account)

I am a green beginner so all this could be completly incorrect.

3MClick to expand...
At a quick glance, if that was my portfolio, I'd sell out asap. Too weak and relies heavily on cap growth which as pointed out could be 0 in ten years.

In HK, some apartments are selling at their 1997 prices.

In Japan they sell at around 30% of their 1980s prices.  

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i am glad i cleared 80% of my property portfolio in the last 15 months.  

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Should look in to UK.  

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with the riots happening - got the jitters

got quite a few relatives there. they're saying the feeling is like doomsday.

but there are bargins to be made.

you should see this episode of property ladder where this dude..investments banker gave up his job to sell tiles and do development and renos. i'll pass it to aaron the next time i see him.  

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Deltaberry said: ↑
At a quick glance, if that was my portfolio, I'd sell out asap. Too weak and relies heavily on cap growth which as pointed out could be 0 in ten years.

In HK, some apartments are selling at their 1997 prices.

In Japan they sell at around 30% of their 1980s prices.Click to expand...
And in Australia, they're not! ;)  

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Melbournian said: ↑
with the riots happening - got the jitters

got quite a few relatives there. they're saying the feeling is like doomsday.

but there are bargins to be made.

you should see this episode of property ladder where this dude..investments banker gave up his job to sell tiles and do development and renos. i'll pass it to aaron the next time i see him.Click to expand...
Yea do show him. Should lunch again soon.

I have a few friends over in UK, hear it's pretty gloomy as you said. The main problem they say is people are now leaving the country because there's no jobs, and 80000 bankers are expected to be sacked from London.

Not sure where they'll go now that all the major cities are sacking people except HK but you need Mandarin there now.  

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If 10 years is your timeframe, you are really going to have to buy well. at 8% growth you are doubling portfolio in under ten years - if there is 2-3years of 0% growth for the next few years you are going to have to manufacture that.

ie buy at a discount. Investors do need to ask themselves if properties are going nowhere in most capital cities other than maybe Syd and Canberra (see this excellent article http://www.theaustralian.com.au/bus...uyers-locked-out/story-e6frgac6-1226137299862)
and they are costing them to hold why not hold off buying till the market starts recovering? The problem is you are then playing the gambling game of timing the market you could miss out - so you need to weigh that up.

In essence if you buy 8% below the market then you have bought yourself 1 years capital growth benefit, hence the manufacturing growth.

Hope this helps
Jane Slack-Smith

PS If buying in US I recorded an interview with a real estate agent over there. You might find it interesting http://yourpropertysuccessnow.com  

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Hi Jane,

Thanks for the informative perspective.

My model has allowed a sum of money within the purchase costs for refurbishments. 3% of the purchase price. This is budgeted to allow the opportunity to add value and force the CG for the period before the next purchase.

My model also shows me it will take about 2% of the portfolio value to hold the portfolio each year. I would have about 3 years worth of buffer in the LOC at any one time. However, it will need topping up by milking the CG across the portfolio.

I do not need the portfolio to double in value in 10 years, I just need to cover the portfolio holding costs, cover the buying costs for the next IP (hopefully within 2 years), and after the 10 year milestone generate a residual amount I can live from.

3M  

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Nice!

I would suggest that depending on your purchase price range you might need to add more to your reno kitty - I always budget for 10% of purchase price (not value).

The holding cost calc is the one most miss but creating the equity (to buy and reno) and the higher yield to assist you is the key. Starting with $45k in 2001 and having over $7mill in property now and holding costs of less than $80kpa with growth over 10% pa on average I can tell you it is well worth the sacrifices in covering the holding costs so you can get to the bigger goal.

Great work in doing all this upfront, most don't. That is why out of 1.6mill property investors only 400,000 buy a second property and why there is less than 14,000 who have more than 6. ( I suspect many of them are on Somersoft)

I wish you well
JSS  

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Hi Jane,

WOW, nice numbers. Especially your holding costs. $6M to $7M portfolio value is the ball park for myself as well in 10 years.

I am trying to look at this whole thing as a business and developing a business plan using my spreadsheet model as at least a benchmark, showing it is possible to reach my target from where I am starting from. By tweaking the factors (CG, interest, purchase price, admin costs, yields etc) I can try and forecast what my risks will be from purchase to purchase. This gives me my budget allowance for the next purchase and potential strain on my buffer account.

One interesting thing I am noticing in my model is the difference in purchase price and its effect on sustainability, although it is important to have a big an assett base as possible, this does not mean you buy the most expensive property you can afford at any one time.

The numbers after ten years are actually better if I buy houses in the $375K range even though I can afford to buy $500K houses. The effect of cashflow is a major factor. It highlights how sustainable the portfolio is (with assumptions of course) over the long haul.

For my first purchase though I am going to have to rely on someone like Metropole because I simply have not done the necessary reasearch in any areas other than my own back yard. By the time I am in the buying cycle again, hopefully two years from now, I would have done extensive research across Australia and have a better feel for where the opportunities are for my budget.

3M  

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MMM said: ↑
I simply have not done the necessary reasearch in any areas other than my own back yard.Click to expand...
Your own backyard can often be a very good training ground and quite successful investment foray than relying on others (lower cost, you get the experience, you have intimate familiarity of neightbourhood, demographics, tastes etc).

The Y-man  

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