THE ASSUMPTION
If the number is higher than what I paid, the investment has been a good one.
THE REAL NUMBER
Growth in isolation tells you almost nothing. What matters is growth relative to the market, relative to what you could have done with the same capital, and relative to what the asset is actually costing you to hold.
What the number on the page is not telling you
A property that has increased in value by 20 percent over five years has delivered roughly 3.7 percent annually. In the same period, well-selected properties in high-demand Australian suburbs have delivered closer to 6 to 8 percent per year, which is similar to the long run average over a 10 year period. Some properties in very high performance suburbs have more than doubled in value during this 5 year period.
Capital growth is only one part of the performance picture. Cash flow, holding costs, interest rates, vacancy, and the opportunity cost of the equity tied up in the asset all contribute to what a property is actually returning. A property that has grown modestly while drawing on your income each month to cover holding costs may be delivering a lower net return than most investors who have never run the full calculation would expect.
This is not about whether the investment was a mistake. It is about whether you have a clear picture of how it is truly performing, so that your next decision is more likely to truly outperform the market.
The investor who sees a positive capital growth number feels good. However, the investor who can look back and know they have outperformed the national market average and been in the top 5-10% of suburb performance knows they have maximised their investment opportunity. For a $700,000 purchase, this can result in $100,000s in additional equity and play a large role in being financially free and living the retirement of your dreams.
