Hi Roland,
In response ...
>> 'Where you have lost my point is that you are comparing the ROI on someone's investment from the date they invested 5 years ago, with the ROI somebody investing new today in the property would achieve'.
But the ROI is calculated on what one's invests (regardless of when this happens). As Mr A invested five years ago then his ROI for the current year would be based on the return (i.e. rent and capital appreciation) for the current year as a percentage of what he invested five years ago. Therefore, the example I provided is comparing the ROIs for the current year for both Mr A and Mr B.
>> 'What I am trying to compare is the ROI that an existing owner and a new investor would earn on the same property from here on. My point is that they will earn the same return from here on (buying costs aside)'.
Firstly, to clarify some of the terminology I use. The investment is the money one put's into the purchase of the asset. The deposit and the buying costs are generally one's investment in a property. [But there may also be others such as renovation costs, etc.] The asset is the thing that generates the return i.e. in this case the property. The investment and the asset are not the same thing.
It doesn't really make sense to compare ROIs by ignoring the deposit or the buying costs. It could give a very skewed and misleading indication of the ROI. For example, the closing costs of investing in Spanish property would be as much as 10% and the deposit can be as large as 50%. Ignoring either or both will give you a very false picture of your ROI on buying Spanish property.
Back to my original example ... Mr A who bought the property 5 years ago, would have done so at a lower price and invested less in it's acquisition. Therefore, (all other things being equal) his ROI year on year should be higher (and importantly his potential risk lower) compared to Mr B who bought the same asset today. They do not earn the same ROI.
>> 'The person who has done well so far could bank their return in Rabobank, and earn 3.35% (and rising!) with no risk or work or hassle or gambling or landlord duties or accounts or finding tenants or finding plumbers etc. etc'.
Yes. In order to utilise the equity the investor could either sell the asset (or part of) or refinance. Based on what he would have earned from the asset todate and may continue to earn in the future then he may be slow to sell unless he identifies something that will earn more than 5% net per annum and/or involves less risk and work.
>> 'Instead they are keeping onto the investment. My question is for what? They will only earn net rental yield of less than 2%'.
You're using the current rental yield metric here which is not so relevant to your question. A yield value of 2% would suggest to me that Mr B would be basing his decision to buy on an expectation of further rental increases and/or capital appreciation. But Mr A has a ROI (for this year) of 5% net plus any capital appreciation.
>> 'So, any existing investor is clearly 'gambling on some (positive!) capital appreciation' just to break even (as compared to sticking it in Rabobank), and quite a bit more to compensate them for all the risks they are taking'.
No, this doesn't make sense to me. The figures show that even in the case of no capital appreciation, Mr A is earning 5% net. However, it is true to say that capital depreciation could wipe out his ROI. If he feels this is a risk (or there is a risk of dropping rents) then he may decide to cash in his asset. I think there is some anecodatal evidence of this happening in the Irish market at the moment.
Perhaps he may as you suggest lodge the money in a bank account but it will be preyed on by inflation - which I think is now about 3.8%.
>> 'So back to my original post, if yields (and by yield I mean total return on investment) are too low to advise a new investor to buy the €600k house (or whatever property), are they not also too low for it to make for the existing owner to keep onto the investment'.
No, not necessarily. Both are likely to have different ROIs for the same asset. What an investor should or shouldn't do all depends on what he sees as an acceptable ROI, acceptable risk, acceptable workload, etc. As the ROI for both is likely to be very different, it is possible that they may come to different decisions.
>> 'I think some posters seem to agree with this, but the only reasons given to date have been either an ignorance of other investment types, or some fuzzy feeling that they've done very well so far so if they lose from here on they're still up on the deal. Dodgy financial logic I would think?'
I think the logic used by most was based on rental yields as opposed to ROIs. The purpose of what I have done is to show that it does matter when one enters (and also leaves!) the market. Some investors have an uncany ability to get the entry and exit points rights. Investors that have nerves of steel and that have bought at the lowest point in falling markets and sold at the highest point in rising markets are those that maximise their returns. The rest of us tend to buy when the market is rising and sell when the market is falling. We may make some money but are also in danger of losing our shirts if we get the timing wrong. Fortunately, the long term trends for property shows that house prices increase - even when there may be temporary readjustments in house prices as in the UK in the 80s.