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The Importance of Capital Growth

Monday, July 15, 2013

"Population growth and housing demand are the strong fundamentals that create capital growth"

Capital growth = the difference between the value of the property and the original cost price

Capital growth is the main reason so many investors choose to invest in real estate over any other investment option.

Put simply, the supply of land is finite, as they say ‘they’ve stopped making it’, whereas the population is ever-increasing and the demand for property is growing at a faster rate than the supply.

These facts alone provide a very stable support mechanism for continued capital growth in Australia.

When I say Capital Growth is the ‘main’ reason investors choose real estate I am cognisant of the fact that some investor focus on cash flow rather than capital gain.  This strategy is viable in certain circumstances which I will explain in later chapters.  However, capital growth IS, without a doubt, the best way to maximise your wealth creation.  Take a look at the graph below.

The above graph illustrates that the property is making an $85 a week loss (also known as negative gearing which I will explain in later chapters).    $85 a week equates to a $4420 pa loss (before tax breaks considered).  However, the property has gone up by 10% (which is within Australia’s long term average of houses doubling every 7 – 10 years). 

So this Investor has lost $4,420 to make $35,000, or a Net Profit of $30,580* 

*(35,000 – 4,420)

I believe this is a far superior strategy than to invest in positive cash flow properties which may put $50 a week in your pocket but not grow in value.  However, there are horses for courses and I will explain in later chapters when, how and why – positive cash flow property can work for some investors.

To maximize your capital gains in a property, it would be best to buy at a time when the market is close to the bottom of the demand cycle.   However, the ‘bottom’ of the cycle can’t always be picked so it’s better to be in the market anyway, rather than hold back waiting for the next ‘bottom’.  This is known as ‘time IN’ the market rather than ‘timing’ the market.
Investors who are interested in making the best capital gain possible should focus on areas where house prices are likely to rise by more than the national average. Later chapters in this book will give you an idea as to what to look for to identify these areas.

Factors such as

1)      Has the property got good capital growth potential, i.e. is the current price likely to increase as demand increases in the area?

2)      Is there a ripple effect?

3)       Is the land size desirable?

4)      What is the prospect of splitting the block? 

A good strategy can be to create instant capital growth by buying a property at less than market value.  Just because a property might be listed at market value, it doesn't mean the seller won't take less for it. Sometimes an urgent sale is required for reasons such as ill health, divorce or the vendor needing to settle on another property. Decide on what you think it is worth and what you're willing to pay in order to get the best capital growth possible.
Shop around. To invest in real estate and create wealth through capital growth you must buy smart with careful consideration not to over capitalize on the investment.  The later chapters of this book will help you learn to buy smart.

 

Do you want to know more? Click here to watch five free webinars on - ‘Proven, Must Know, Property Investment Advice’

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