At A$494,000, how much cash flow should I demand before pricing in growth?

[askTheView]

I have two options and neither is especially comfortable. The A$494,000 Sydney serviced apartment offers only a modest yield, although its employment, transport and resale prospects appear stronger. Less expensive properties elsewhere provide more income now, but tenant churn and weaker liquidity could erase some of that advantage.

My instinct is to require the Sydney property to meet a minimum return after borrowing costs and realistic allowances for vacancies, management, repairs, insurance and property tax. Any price growth would then sit outside the base case. Is that a sensible discipline, or could it reject a better asset simply because its current income is lower? I also need to separate ordinary vacant time from downtime caused by changing tenants.

 

[talia_plans]

Not too rigid. I would give appreciation a value of zero in the base calculation. If the apartment cannot remain acceptably cash-flow positive after a realistic vacancy allowance and higher financing costs, stronger location fundamentals do not repair the holding risk. The detail that would change my answer is whether management charges rise with revenue or include substantial fixed costs.

 

[CuriousBench]

I partly disagree. A hard minimum yield can push you toward assets with better headline income but worse turnover and resale prospects. What does “modest yield” mean here—before or after the serviced-apartment management cost? Also, do you have enough information to separate ordinary vacancy from periods lost to tenant turnover? Without that breakdown, the comparison is premature.

 

[MinaGale]

Run three cash-flow columns for the Sydney property: expected occupancy and financing, weaker occupancy, and weaker occupancy plus higher financing costs. Include maintenance reserves rather than relying only on recent expenses. Then run the cheaper alternative through the same columns.

I’d count no appreciation in any column, but note Sydney’s employment, transport and possible liquidity advantages separately. If it only works after assigning a growth rate, pass. Before deciding, confirm how insurance and property tax apply to this particular serviced arrangement, as those costs can depend on the property and jurisdiction.