Let’s look at an illustrative example of what you could realistically expect if you buy and hold a property for five years in the UK (in today’s market).
• Assume buying at 20% below market value
• Assume buy price is £80,000 for a £100,000 property
• Assume 5% net income (not including mortgage finance or factoring in rental increases)
• Assume 5% pa capital growth
In 5 years’ time you will have received:
Capital growth: £27,600
Equity profit: £20,000
Total return: £67,800
On an investment of £80,000, this is an 85% return!
The illustration above makes one very strong point. Every investor will receive a return (over time) that is made up of three elements: income, equity profit locked in at purchase and capital growth over time.
However, you only benefit from income during your ownership. The other two elements are frankly irrelevant until you decide to liquidate your investment.
So the real question you need to ask is much simpler – do I intend to keep the property for income, or am I planning to dispose of the property to benefit from the realisation of capital and, if so, in what timescale?
If you expect to hold the property long term, because your requirement is for income, then you can forget the discussion about capital growth. Long term you are not going to lose any money in property, so the immediate focus must be on income.
That’s as simple as it gets. Need income now? Then invest for income today!
There is one refinement, which is to consider the growth pattern of your income over the next few years. Some investments are structured so income levels rise over the first (say) five years. In certain situations you may be better off taking a lower income in years one and two if there is a genuine prospect of receiving a significantly higher income later on. Examples in this category can include hotel rooms, units in large developments which need to reach full occupancy before rents increase, etc.
This illustration highlights a number of important points:
The numbers are only part of the story. In this example, investment in Memphis clearly gains the number one spot for income AND growth – but is only available to bulk investors with at least $130,000 of capital available.
The timescale really matters a lot as well. If you take a longer timescale, the higher growth anticipated in Atlanta would actually take that location to the number one spot for growth over 7 years or more. You need to consider both a snap-shot in time and the change that happens when longer investment periods are considered.
You may have preferences which also need to be part of the decision process. For example, if you like buying new property then Atlanta wins hands down. Typically, our properties are less than 10 years old and in some cases have never been lived in. Alternatively, if you like a high proportion of Section 8 tenants (government supported) and a low risk environment, Buffalo would be the choice. Finally, if you want rock bottom pricing and both high income and massive immediate equity, Memphis wins.