Are you saying you calculate (increase) your return by adding in a 'rent not having to be paid' factor? Where do you subtract interest payments & purchase costs?
Well if you don't pay interest on your PPOR then the rent "saved" is a true after tax return on the capital invested
- so if the value keeps pace with inflation, plus even 1%, plus the rent saved, = a pretty good low risk, inflation hedged and CAPITAL GAINS TAX FREE investment
. On an IP, of course you factor interest in, but only the actual cost after accounting for tax deductiblilty etc.
Look let's use my scenario which as had been pointed out provides a 1% return above inflation (very conservative - of course there is a good chance that if you buy the *right* property in the *right* location you could gain a much greater return that this, but anyway....). Let's say you buy an IP, borrow 90% of the cost - fixed rate loan at say 6.5%, and your marginal tax rate is 45%. Rental yield is say 5.5% (Sydney average for units). Let's deduct 1% from the rental yield to cover annual costs, so net 4.5% yield. Interest cost after tax deduction is actually 3.25% of property value (90% x 6.5% x 55%) net.
So you NET gain from property = 4.5% (net yield) - 3.6% (net interest/costs) + INFLATION on capital, + 1% = 2.25% of total property value.
Doesn't sound like much, but remember that's with only 10% of the total value put in by you! If the place is worth say $300k, that's $6750 pa profit, or 22.5% return on your capital actually invested. That profit increases every year as the value of the property increases (even just with inflation) due to interest only being paid on 90% of the initial purchase capital.
Now of course there is risk as well - the value might fall in the short term, or maybe you have bought in the wrong location and you don't keep pace with inflation. Likewise you could also make a lot more money if you bought well. My example is also simplistic in that you have to account for buying/selling costs. My point though is that even with only 1% growth above inflation, over time a very good return on initially invested capital can be made. You can even borrow 100% and invest zero of your own capital
But the risk rises accordingly as well.
I'm also not saying that my example would be the BEST long term investment at all times and at any time. Right now there clearly seems to be more potential in shares than in say Sydney property (or least that was the case 3-6 months ago!), but in terms of diversification and place to park personal wealth, property is still an important asset class IMO which is ignored at your own financial peril!
So are you permanently bullish on property?
Well depends what you mean - in the long term I believe property will in most cases provide at least the sort of returns I outline above, but of course prices occasionally fall as well. I don't think the fundamentals under-pinning the market in AU and Sydney in particular are likely to change anytime soon.
So what I DON"T subscribe to are the "property prices to crash up to 40%" type bearish outlooks. I think PPOR ownership over the long term is an essential part of the road to financial independence for 95% of people - the forced saving of having to pay off a mortgage plus the inflation hedging + real growth provided in the capital appreciation leaves most people in a much more solid financial position than the alternative.
Property investment is a different kettle of fish - timing is more important, as is buying the right property - but again, with a long term outlook it can be a very profitable investment, both in terms of ability to generate consistent, inflation hedged cash-flow (important if you are living off your investments) , and steady real capital growth as well. Additionally the potential to add value through your own work/effort (renovations etc) is another added benefit (if you are that way inclined). Property flippers and people that don't do their sums properly or who don't understand the risk should stay well clear of property investment.
Cheers,
Beej