Originally Posted by
Snoopy
Daytr, I think your general line of thinking is right, although I might take issue with some of the details. 30% less refurbishment costs every five years? That sounds credible if we look back over the last 5-7 years. But whether that will happen over the next 5-7 years, I am not sure. My gut feeling is that price to income ratios in the wider property market, and the cessation of twenty years worth of interest rate falls means that house prices will not rise that fast going forwards. OTOH I doubt if refurbishment costs will stop rising with inflation plus a bit more as good tradespeople are hard to come by.
A $1,2m unit bought back at $800k (presumably the price that the previous licence to occupy holder paid ) is a rise of 50% in 5-7 years, which is a quite bit higher than the percentage price rise even you were suggesting. I don't think you can claim another 'capital gain' of $100k over and above that. That sounds very much like double counting on an already optimistic price rise scenario., even allowing for your somewhat generous refurbishment cost assumption of $200k. So perhaps a gain of $200k per housing unit in the value of that float every 5-7 years might be nearer the mark? A bit lower than your 'very conservative' figure of $400k! Given NZ's infrastructure issues, I would expect rates bills to keep rising faster than inflation too, putting another permanent squeeze on retirement village operating margins.
But again all this is from an 'operator perspective'.
If we instead look from the 'investor perspective' the 'investment equation' only works if our investor can buy this house at half price. So from an investor perspective that house has increased in value over the 5-7 years from $800k/2 = $400k to $1,200k/2 = $600k (because our investor has bought the house via OCA's sharemarket listing at half NTA). However, the building team who does the refurbishment will still have to be paid in 'todays cash' which means $200k. That wipes out all of the investor capital gain of $200k, which means that in inflation adjusted terms our investor is going backwards. As you suggested in your post, that $200k of fix up costs is probably over generous. But your figures do allow me to show a kind of 'worst case' scenario where our investor ends up 'treading water' and not making any money at all, despite the 'float' rising in value.
SNOOPY