The importance of Growth
2 properties both for sale each $500k – which one is the better investment???
A. Good growth prospects, returning $15k pa (assume inner Melb)
B. Low growth, twice the return ($30k pa) (assume regional)
Of course a number of factors are at play, but generally the key ingredient is growth. Let’s assume the inner city property increases by 7% pa and the regional by 2% pa. I’ll also assume the yields remain the same. This is the result:
After 25 years the city (growth) property is worth almost $3m whist the country property hasn’t even cracked $1m. Also, the rental derived from the growth property overtakes the low growth and is streets ahead after 25 years.
So on face value, although earning twice as much is appetising, the key ingredient is buying something with high growth because that’s where the real money is made. So what is high growth? Ideally something that has a demand/scarcity factor that is hard to buy and easy to sell. You don’t want that the other way around!