…the power of TIME….

Recently we had the pleasure of assisting a family with a very special purchase. Being investors themselves, they’d experienced first hand the benefit of capital growth over many years and found themselves seeking out the option of assisting their children into property investing too.

They didn’t claim for one minute that they’d chosen perfect properties to invest in over the years, but what they did admit to doing well was buying to hold for the long term.

So when it came time to help their eldest child enter into the property market, they faced a few interesting questions.

– would their support damage their children’s opportunity to do it themselves, and hence take away that sense of achievement?

– would their children lament their parents’ decision to hand them a property which could sustain negative cashflow?

– would the children handle property ownership responsibly?

– could the parents manage to find a second similar property for the second child?

– and what issues could arise if one property out-performed the other?

After running cashflow calculators, researching suitable areas which could deliver a combination of attractive growth, particularly strong yield and a low-maintenance dwelling, they initially pondered a $200,000 purchase for each child in a regional town. Their concerns however were that they’d ideally prefer a metro-asset which could deliver metro-style growth.

The only way that they could manage this feat was to increase their budget. Making the decision to combine both children’s entitlements into the one property meant that they could secure one strongly performing asset, and avoid the dilemma of varying growth for each child’s nest-egg. It also meant that with a 90% LVR, the parents could fund 20% plus the stamp duty, and then leave the property as a ‘set and forget’ where the tenant’s rent will cover the outgoings and the cost of ownership when leased as a neutrally-geared property.

Capped at $400,000, they decided to pursue Sunshine West and target a renovated property on a subdivided parcel of land.

While the subdivision would place the property into a lesser capital growth class to a full block, it did have it’s upsides. Firstly, it meant that their allocated budget could ensure them a renovated house, (as opposed to an old original house on a full block). The benefit of the already-improved dwelling enables them to target a good quality tenant and to avoid constant maintenance issues. Secondly – and most importantly for them, the smaller block enables them to achieve a higher rental yield, as tenants rent house, not land.
Delightfully, a helpful local agent grabbed hold of the brief and alerted us about a brand new listing which hadn’t even had the photographer through.

The house presented well, checked out soundly with a building inspection and with an appraised rental of $330pw, should return above a 4% gross rental return.

The interesting concept however is that of time. 

While the parents have had the best of intentions for both of their children, the key difference for both children is a vast difference. They have an age gap of some twelve years. The eldest child is now an adult and will no doubt be looking to access some of the equity in the property within the next five years. As his career grows, when he partners, if the opportunity to take on a building project comes up for this young carpenter, he will certainly look at his nest-egg with appreciation and will enjoy the relief that a healthy bundle of equity will provide him to get started.

His younger sister however will have to wait until 2024 for her share to become available to her.

Our market trajectory cannot be mapped out by anyone, and as we know from the last ten years, our peaks and troughs can strike for many reasons, but provided the property is not disposed of, a loss or gain is not crystallised, and the children maintain a healthy tenancy for the property, they should be able to enjoy the head-start that this property was intended to do for them.

Sunshine West was carefully chosen with growth, gentrification, amenity and opportunity in mind. In a ten year time horizon, a lot could be in store for this exciting suburb.

When we consider areas which have also undergone gentrification over the last twenty years, a perfect example suburb is tiny Kingsville; wedged between West Footscray, Seddon and Yarraville. Home to many period Edwardians and nice family home-sized blocks, Kingsville has certainly come of age. Taking an example of a property we recently secured for lovely clients, 31 Wales Street Kingsville exhibits quite an interesting growth story.

With confirmed recorded sales in 1993 and 1997, and two asking prices for separate sales campaigns between the actual sales, we could map out six data points over a 23 year period to illustrate the power of time and capital growth:

So while we can’t compare a house on subdivided land in Sunshine West to a period home in Kingsville, we can certainly share the power of capital growth and the relationship between time and value growth in a well-located suburb.

Their boy will benefit. Their little girl certainly got the better deal.

In twelve years’ time, her share of equity will be far greater than that of her brother’s at the same age. Her advantage will be significant. But these things we do for our children are borne from a desire for them to have more than us, do more than us, and enjoy life to its fullest potential. Time will tell how this pair fare with their gifted nest-egg…. Their conditions of ownership are clear. They can’t live in it. They can’t sell it. They have to let it just do its thing.