Comparing High Capital Growth Properties and High Cashflow Properties

[buxlo122]

There are a range of suburbs and different types of properties to invest in in Auckland. The trouble is trying to compare them from a investing point of view. It is this problem that I am wanting to discuss in this thread.

My hypothesis' are:

1. Capital growth comes solely from the increase land values.
2. By factoring capital growth based on land values we can make returns comparable between properties.
3. Central suburbs have the same percentage increase in land values as outer suburbs. They appear to have high capital growth rates because land values make up a larger proportion of the properties value.
4. Houses have the same percentage increase in land values as units/townhouses. They appear to have high capital growth rates because land values make up a larger proportion of the properties value.

To test my hypothesis I have prepared a spreadsheet that calculates the return based rent and capital growth(based on land values). The spreadsheet calculator is based on 5 properties I found off Trademe in Auckland.

I would like to get some feedback on weather what I am trying to do is viable and any improvements I could make.

Ihttp://bit.ly/107kB7D

[Neongreen]

One thing to keep in mind is the basic utility of housing. If you take, Takapuna, for example, if you want to buy there you need to either buy a very expensive house or a cheaper apartment - while land value makes up a smaller proportion of the value, I believe the houses drag the apartments' value up.

[buxlo122]

I have change the share settings on the google spreadsheet so all should be able to view now.

[buxlo122]

One thing to keep in mind is the basic utility of housing. If you take, Takapuna, for example, if you want to buy there you need to either buy a very expensive house or a cheaper apartment - while land value makes up a smaller proportion of the value, I believe the houses drag the apartments' value up.

However the land that a apartment is on is worth more per square meter because of it zoning so apartments could drag up the value of surrounding houses.

[PC]

Are you buying with cash or is there a mortgage?
Usually want to see expenses to work out cash flow.
Insurance, rates, maintenance & interest payments.
And the inflation rate for expenses has recently been a tad more than 4%.

Leverage hopefully makes the pitiful returns worth the hassle.

[buxlo122]

Are you buying with cash or is there a mortgage?
Usually want to see expenses to work out cash flow.
Insurance, rates, maintenance & interest payments.
And the inflation rate for expenses has recently been a tad more than 4%.

Leverage hopefully makes the pitiful returns worth the hassle.

When working out my rental returns I use net rent (gross rent - rates - R&M - insurance - 2 weeks vacancy = net rent)

I am buying with a mortgage however that is somewhat irrelevant to what I am trying to do. Weather to use a mortgage or not is a financing decision rather than investing decision. I am more concerned with the investing decision i.e. which property to invest in and which property has the highest return on overall.
This is why I started this thread for feedback on the model/tool I had developed to compare the rates of returns of different properties. Then I can compare and find which properties give the best return overall.

I have made the assumption that rents will rise at the same rate as expenses.

[Rosco]

Do you really think the land in Otahuhu will get the same capital gain percentage as the land in Remura?

Obviously the land is worth much more in Remura, so in dollar terms will go up more. But I would also have thought that as a %, the better areas would go up more too.

From your spreadsheets, Otahuhu is best on paper. But is it really? It all comes down to , will it get the same 4% capital growth on land and 2% gain on rent as Remura, or will the better areas perform better?

This is the age old question, that I don't think there is a real answer to. Do better places get better capital gain then worse places? Based on your formula, Tokoroa or bluff or other smaller towns will probably perform best, but this probably isn't the right answer!

Ross

[buxlo122]

Do you really think the land in Otahuhu will get the same capital gain percentage as the land in Remura?

Obviously the land is worth much more in Remura, so in dollar terms will go up more. But I would also have thought that as a %, the better areas would go up more too.

Playing Devil's advocate: It could also be argued that areas like Remuera are less likely increase at a higher % rate because it is unsustainable.

From your spreadsheets, Otahuhu is best on paper. But is it really? It all comes down to , will it get the same 4% capital growth on land and 2% gain on rent as Remura, or will the better areas perform better?

My spreadsheet assumes the same capital growth and rental growth for the same for area. In my example I have chosen the area to be Auckland, but you could narrow it down further and use different capital growth and rental growth rates for suburbs or towns. I would be reluctant to have different growth rates for Otahuhu and Remuera as they are both stable established suburbs in Auckland. I would have higher rates if I was looking at areas such as Albany, New Lynn, or other suburbs where there are big infrastructure developments are going to drive the growth of surrounding land values.

It would be really good if someone could share historical capital growth rates of land for the auckland region. Or does anyone know where this could be found.

This is the age old question, that I don't think there is a real answer to. Do better places get better capital gain then worse places? Based on your formula, Tokoroa or bluff or other smaller towns will probably perform best, but this probably isn't the right answer!

I would have different growth rates for small towns that don't have growth potential. I added a Bluff investment property to my spreadsheet for comparison. It had the worst return out of all the properties I looked at.

I would also add that the wider the geographic spread the more assumptions that need to be made about land value and rental growth rates. With more assumptions there is the potential for more errors to be made and accuracy to decrease.