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PHILOSOPHIES
* Investments in Cities vs Coasts
* Below market value investments
* Below market value today vs future
* Buyers and sellers markets
* Compound capital growth
* Fees vs Commission
* Finance vs Growth
* Power of finance
* Growth vs Discount
* Location, Location, Location
* Rental market oversupply
* Speed vs Caution when investing

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Property Investment Philosophies


Which is more important - good finance or capital growth??


The simple answer is both are important - but the real answer is more complicated.

If you buy a property worth 100,000 and you pay for it all in cash and it grows by 10% per annum then your return on investment (ROI) is only going to be the compounded annual growth rate, in this case 10% per year, which may still be better than a bank account though we know it could be better.

At the same time you could buy a property with 100% LTV mortgage, but if the market does not grow at all (or worse falls in price) then your ROI is a big fat zero, which for most people would go against the idea of buying property in the first place.

So yes you need both good growth and good finance (to leverage that growth).

But how do you compare whether its better to invest in a property market (Market 1) with say only 10% growth but where the mortgage rate is 90% and another market (Market 2) where the growth might be 20% but the finance rate only 70%?

At first glance you might chose the 20% growth market as it has double the growth.

But looking at the numbers (assuming all costs are equal between the two markets and the rent covers the mortgage) after a 5 year period your ROI in Market 1 is 611% and in Market 2 only 496% ... now which one would you choose?

Furthermore, the chances are that the 10% growth rate in Market 1 is going to be much more sustainable and lower risk than a growth rate of 20%.

Just because a market may be growing at 20% today it does not mean it will continue to do so in 3 years time. So in Market 1 you greatly increase your chances of realising those returns. And if locals have access to good finance this both a sign that the local banks consider the market to be low risk and will be a key driver to price growth as it makes property more affordable for locals hence helping to maintain demand.

Many foreign property agents push the fact that a market may be growing at 20-30% per year (often this is not true anyway and is no guide to the future performance - but that is another issue) however, many people forget that another one of the keys to successful property investment is the power of finance.

So we would argue that yes capital growth rates are very important but don't overlook the quality of the mortgage products in each market.

We believe it is often better to buy in a market with good finance products and good healthy sustainable capital growth rates - this is where you really make your money over the longer term.


The dowloadable spreadsheet shows various scenarios comparing finance and growth and why it vital to have good finance and good growth to achieve the best returns.
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