Hi Everyone
I'm trying to work out some ratios/data in regards cap growth vs yield and where is the flexion point based on paying down the mortgage.
The logic is as follows. While the argument for capital growth is relatively easy to understand the argument for yield is a little bit more complicated. The point being that if the yield is high enough to pay down the mortgage then the return may be similar to cap growth, depending on the amount of growth.
By way of example I note the following. Let us say that one had a yield that was high enough to pay p/i (and tax) over say a 15-20 year time period. Alternatively we have someone who was negatively geared in a capital appreciating area but not one that was rocketing (say Wgtn). Over the same period let's say the value of the house doubled.
Now at this point, all things being equal, the yield investor will be up. The negatively geared person will have been required to top up the property offset by the cap growth. The yield investor will have had no growth but will have in effect have achieved the same gain on their balance sheet by way of the liability on the asset reduced.
The questions I have:
1. What would the yield on the property need to be to achieve this. Accounting for running costs I would estimate that it is around 20%.
2. If an investor were to put a cash deposit, to achieve this ratio, would not their full investment be recycled quicker that under a cap growth model? Once the debt is paid off it would be simply a matter of years until they got repaid?
3. Is this not a smarter model in period of low inflation?
I look forward to people's thinking on this.
I'm trying to work out some ratios/data in regards cap growth vs yield and where is the flexion point based on paying down the mortgage.
The logic is as follows. While the argument for capital growth is relatively easy to understand the argument for yield is a little bit more complicated. The point being that if the yield is high enough to pay down the mortgage then the return may be similar to cap growth, depending on the amount of growth.
By way of example I note the following. Let us say that one had a yield that was high enough to pay p/i (and tax) over say a 15-20 year time period. Alternatively we have someone who was negatively geared in a capital appreciating area but not one that was rocketing (say Wgtn). Over the same period let's say the value of the house doubled.
Now at this point, all things being equal, the yield investor will be up. The negatively geared person will have been required to top up the property offset by the cap growth. The yield investor will have had no growth but will have in effect have achieved the same gain on their balance sheet by way of the liability on the asset reduced.
The questions I have:
1. What would the yield on the property need to be to achieve this. Accounting for running costs I would estimate that it is around 20%.
2. If an investor were to put a cash deposit, to achieve this ratio, would not their full investment be recycled quicker that under a cap growth model? Once the debt is paid off it would be simply a matter of years until they got repaid?
3. Is this not a smarter model in period of low inflation?
I look forward to people's thinking on this.
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