You will hear a lot about capital growth when you are looking at properties to buy for investment and it’s often used as a selling tactic from agents to highlight attractive elements of a property. It’s something to make sure that you are aware of as although it is a key element that you should consider, it is important to do your own research when it comes to evaluating the capital growth of properties (and the areas they are located in). Capital growth is basically the increase in value of your property (or portfolio) over time and is an element that you should consider alongside the property’s yield (which is the amount of income divided by the amount borrowed against the asset, which I’ll discuss in a later post). No agent has a crystal ball that can predict future capital growth no matter how much they might want to make you believe they can see into the the future. Commonly, agents and property commentators state that a property will double in value every 7-10 years. In an ideal financial climate this can be the case but it’s dependent on a huge variety of things such as employment rates, local development, government investment and desirability of the area to name just a few. Take a look at my post on Detroit so see an extreme example of where these factors come into play to the detriment of capital growth.
If you are familiar with an area over a lengthy period of time you can often start to develop your own understanding of the capital growth likely for properties in the region. An example that I would like to share came to my attention this week with the listing of the house that belonged to my grandparents (and was built by my grandfather!). Having spent a considerable amount of time in this house myself and literally living around the corner from it for 18 years I certainly know this area well. This property was sold around 15 years ago for less than $100,000 AUD which was a typical price for a property of it’s type at the time (a bargain price in anyone’s books nowadays!) Since then the property has only had one owner and has also been subdivided with another house being built on the rear yard and subsequently sold off. The original property is now for sale for $248,000 AUD which sits perfectly with the theory of doubling in value every 10 years (and probably then some considering that the block it is on is only now half the size). It’s a good example of becoming familiar with an area and I’d strongly recommend that even when you are not at the stage of buying that you keep an eye on the progress of prices in an area that you are interested in. It’s a fascinating exercise and also can help you to be suitably informed when dealing with agents in the future.
Whilst this post is about the basic principle of capital gain I just cannot resist a walk down memory lane with such a familiar property. Feel free to stop reading here but if you like some good historic before and afters the photos below will be interesting.
Below are the before and after satellite views of the property (2006 & 2012)
These pictures show the subdivision and subsequent new house built on what was formerly the back yard. Being situated on a corner, properties such as this are often in demand from those that can see the value in utilising such a large backyard for further development.
And before and after photos from 50 years ago (thanks to my parent’s wedding album!)
When looking through the current pictures it’s interesting to see that the only major internal change is the removal of much of the original carpeting and polishing the floorboards. It certainly gives a more modern look but the kitchen and bathroom are still original. Considering this, this capital growth is still very good!