All Topics / Help Needed! / Yield Confusion

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• Intrigue
Member
@intrigue
Join Date: 2010
Post Count: 208

Hello all,

Firstly for those following my learning process, I would like to thank you all very much for the time and effort put into helping people like me.

After the past couple of weeks my focus has been on yield. Exactly what is yeild…. PROFIT?

A friend gave me a calculation rent x 52 divided by purchase price equals yield.. okay, so a home that rents for 350pw with a purchase price of \$300k has a gross yield of 6%. I was taking this sum for granted when I had a thought..

If I have a 90% interest only loan for \$270k my repayments @7% would be \$18,900pa. The income from the property would be \$18,200 Thus I would be required to pay \$700 per year + rates etc. This situation sounds pretty good but its not really PROFIT is it…. I have missed something.

After due thought I came to the conclusion that the yeild equation must not take into consideration the interest rate on the borrowings (Is this right?). 'I read a thread on here about how low a yield would you accept', interesting thread. one poster said they believe the yield should be equal to the current interest rates…. NOW THIS MAKES ALOT OF SENSE (I like this).

So now I looking looking looking for a property with a yield of at least 7% (not to buy yet as I not have 10% deposit yet but as a learning exercise).

So today I buy my first API magazine (I got to the front cover and signed up for a 2yr subscription, they going to give me free book by Michael Yardney.. wahoo). Anyway….

I am not far into the mag.. page 28 to be exact, before I read the article I see a table of 'his numbers' and the yields are not 7% not even close, so I go to the back of the book with the rental yields by suburb and VERY VERY Few that have such yields. Now I understand that yield will change with market conditions etc people buy for different resons etc but am I right/smart or dreaming to be looking for a property with a 7% yield?

LH
Participant
@lh
Join Date: 2010
Post Count: 97

Hi Intrigue,

You're not too far wrong, most established areas in the inner city would get to perhaps a 4%+ yield, however as the value of the property increases, that yield will get you a higher return and eventually the property will be positively geared (what is sometimes referred to as a yield curve).

My thought is for the first IP go for something that might cost a little more to hold (ie lower yield) but with higher potential capital growth and then let nature take it's course for the property to break even and also get the benefit of a better wealth outcome.

To get the higher yields, then the choice is to look for a cheaper property with higher rentals (say rural areas) or for CBD property where the rental demand is high and you can command higher yields (some developers will even give you a guaranteed 7% for a period) although the capital appreciation might be sacrificed.

Feel free to come along to one of our free property investing seminars where we cover this type of condition.

Terryw
Participant
@terryw
Join Date: 2001
Post Count: 16,213

I think yield should not be regarded as profit but as return on investment (before costs). it doesn't take into account borrowings just return based on value.

Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://structuring.com.au/
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Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

Jacqui Middleton
Participant
@jacm
Join Date: 2009
Post Count: 2,539

There are properties with high yields, sometimes they come with high risk (eg property in towns that rely on one company or industry for employment…. so if that company moves out, your demand goes down and you struggle to find tenants).

It doesn't take long to get a property to the "break even" point where costs equal rent.  So you pitch in some extra cash for a little while and then you no longer have to.

You sound like you're on the ball with numbers, so those stats in the back of API magazine will be your new best friend.  I like to look for areas that have a good balance between capital growth over 10 years, rental yield, and low vacancy rates.

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Terryw
Participant
@terryw
Join Date: 2001
Post Count: 16,213

Usually high yields means high risks – the price had had to come to a level where the property could be sold.

But a mate of mine has recently purchased two properties in Sydney with very high yields. He could retire and live on the profits after taking into account the expenses and 100% borrowings – thats how high the yields were. One was commercial and the other residential.

Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://structuring.com.au/
Email Me

Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

Terryw
Participant
@terryw
Join Date: 2001
Post Count: 16,213

oh, and one property doubled in value within a year too!

Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://structuring.com.au/
Email Me

Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

Graeme Freer
Participant
@freerenterprise
Join Date: 2008
Post Count: 47

Yep. That's the holy grail – capital growth AND yield. Generally it is a trade-off. Depends on individual circumstances, stage of life etc., but most of my clients are looking at the BIG PICTURE profit (go for CG so long as sufficient yield to provide enough cashflow to keep investing).  I also bought 2BR in Elizabeth Bay for \$305,000 in late 2006 and 7%pa yield. Recently resold for \$475k. Current recommendation is Wollongong with vacancy rate of only 1.5%pa and strong population growth in key areas.

Freer Property and Finance

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PO BOX 304 NEWPORT BEACH NSW 2106
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Graeme Freer | Freer Property and Finance
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Jacqui Middleton
Participant
@jacm
Join Date: 2009
Post Count: 2,539

Wow Terry, sounds very awesome!  Care to share any details of these amazing investments your friend made?  eg area?  type of tenant the commercial property attracted?

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Terryw
Participant
@terryw
Join Date: 2001
Post Count: 16,213

Don't want to give away too many secrets – but a very good location. The commercial property was empty, but soon found a tenant with a couple offering more than expected. I think that one was around 15% yield based on purchase price and someone offered \$100,000 more to buy it before it even settled.

Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://structuring.com.au/
Email Me

Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

Garry Mac
Member
@garry-mac
Join Date: 2010
Post Count: 22

Hi Intrigue

Sounds like you have been given some very good advice here.

A few years back we bought a block of (low-set) units in South-East QLD: 4 @ \$65,000 each + one @ \$85,000. Rent was \$155/wk x 4 + \$200 for the fifth unit – very strong ‘pure’ positive cash-flow!

We sold the units 18 months later and doubled our money – more good luck than good management as we bought for cash flow – not expecting the exceptional capital growth. These deals are becoming much more difficult to find unless you are prepared to increase your level of risk. However, these days we are still able to achieve strong capital growth and cash flow via a value-add strategy.

Good luck
Garry

PS Terry is absolutely correct…yield does not equal profit

Thack
Member
@thack
Join Date: 2010
Post Count: 11