Thursday, 30 January 2014
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You've heard it all before - the mythical property that doubles every seven to 10 years, or even more quickly. You're wondering whether or not the numbers can be true, particularly with the strong results recorded for 2013.
The Real Estate Institute of Victoria has been on the record that the value of houses, in Victoria, have doubled every 10 years when looking generally at the market.
Ken Raiss, from accounting firm Chan & Naylor, is also of the understanding that a good investment doubles in value and that this is the benchmark to look for.
"A good capital growth property will pay for itself within 10 years. For those who like numbers, a property growing at a compound rate of 7% per year over a cycle will double in value in about 10 years. A poorer-performing capital growth of 5% will double in just less than 14.5 years while a superior 10% growth property will double in just over seven years," he says.
However, not every property will double. Welcome to the 'Rule of 72'. This quick mathematical rule of thumb is one to keep in mind as a benchmark if your expectation is, really, for your property to double in this time.
Think of it like this - if you divide 72 by the expected percentage of annual growth, what you will be left with is the number of years the area has taken to double. For instance, if an area is growing at 10% per annum, steadily, then it will double in 7.2 years.
Here's a quick cheat sheet for you that will help you work out the return prospects based on the current or projected rate of annual growth:
This leaves us with the knowledge that an area needs to grow by 7.2% per annum to double in 10 years.
However, property doesn't work on a steadily, regularly increasing incline and so estimates can be limited in their usefulness; as can be looking to the past at the 10 year averages so often cited (also seen as the 'average annual growth', which is usually worked out using the past 10 year's worth of statistics).
Where some properties will significantly increase in value for two years and then slump for eight, others may indeed double in 10 years, only to spend another 10 year period without much growth. This is where many trip up, by assuming that regardless of what they buy, where they buy and when they buy, it will double when the 10 year clock ticks over.
Late last year, Monique Sasson shared her opinions on what it takes to choose a property that doubles.
"[It's] really important for investors to understand that property values and growth factors will fluctuate, but what we're trying to do in terms of really good quality asset selection is beat the performance of the wider marketplace," she said.
"When it comes to houses we like to choose investments that are anything from the 1880s probably to about the 1940s or 1950s. And the key note here is that the asset has to have what we call scarcity value. In other words, there has to be much more demand for that particular type of asset in that particular location than there ever will be supply to satisfy that demand. The same criterion applies to apartments. With apartments you want anything from 1930s through to about the 1970s. Those are the assets that really confer and satisfy that criterion of scarcity value."
She also pointed to her scepticism that off-the-plan properties could reach this point, as well as the requirement for some sort of architectural scarcity in the dwelling chosen.
See more of her thoughts here on what it takes to buy an asset that will perform.
It's worthwhile remembering that this is a fairly blunt tool, used for your first estimates. You will want to factor in rental return and yield, vacancies, the cost of the property to hold and a number of other calculations. See here for some more 'How to' guides.
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