All Topics / Help Needed! / Minimum Yield?

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  • Profile photo of dseniordsenior
    Join Date: 2013
    Post Count: 1

    Hi all,

    Thanks for reviewing my question.

    I am looking at buying my first house as an investment property. I have read Steve's book and he explains why Negative Gearing is a poor strategy to investing so I want to get something as close to neutral or positive as possible.

    My issue is that for my first property I am buying in VIC, specifically Hawthorn. Its a 2 bedroom unit and it indicates a price range of $380k to $410. I think it will go for about $420k.

    The real estate agent says it should return around $400pw rent.

    By my calculation that gives a Yield of about 5% and my mortgage interest rate will be around 5.6%

    Should I bother with this property or find something else? What is the maximum I should pay for a unit returning $400pw?

    I know the VIC market is poor at the moment and from what I have been told it will be for the next 4-5 years. This will eventually become my PPOR after about 12 months and will probably move into something bigger after a few years so I would love some advice.

    Does anyone have recent experience in the VIC market that can suggest an area to invest? I will be investing interstate after this first purchase so VIC only for now.

    Profile photo of Jamie MooreJamie Moore
    Join Date: 2010
    Post Count: 5,069

    Hi and welcome aboard.

    Personally, I don't have an issue with negatively geared investment properties providing the capital growth over the long term makes up for the loss – or they can be utilised in a way that adds value (reno, develop, etc).  

    The yield you're looking at isn't overly impressive – but do you think it's going to go up in value over time? Can you afford a property that's costing you money to hold onto? If yes – are you planning on purchasing additional properties over time? If so, you'll need to factor in the holding costs of this property when devising your longer term investing plan.



    Jamie Moore | Pass Go Home Loans Pty Ltd
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of DerekDerek
    Join Date: 2004
    Post Count: 3,544

    Hi Dsenior,

    Just did some rough numbers for you assuming an 80% loan of $336K

    Interest cost at 6% = $20K

    Ongoing property costs at 1% of purchase price = $4K

    Property Management Fees @10% = $2K


    Rent @ $400/wk = $21K

    At current interest rates your shortfall = $6K/annum or $115/week. N.B. I have not factored any negative gearing benefits into the calculations nor have I considered rate increases and these will come.

    Only you can work out whether or not you'll be ahead.

    Your desire to make this your own home in about 12 months does muddy the waters a little. Sometimes factors we use to select a home are different to the factors we use to select an investment.

    Profile photo of Adrian 00Adrian 00
    Join Date: 2013
    Post Count: 10

    Hi Dsenior,

    Here is a basic example of how a negatively geared property can turn into a positive cash flow property due to rental price growth. You can see that rental income starts to exceed mortgage repayments by the 6th year before costs. Obviously this projection will depend on how much rent grows in the area you purchase. You may want to crunch rental growth for each of your prospective properties.

    Six years is quite a while to wait for positive gearing. I'm sure many of the investors here would shun it (if there aren't significant capital growth prospects). Make your own call.

    $400.00 weekly rent

    annual rental price growth (5%)


    $400.00 – year 1

    $420.00 – year 2

    $441.00 – year 3

    $463.05 – year 4

    $486.20 – year 5

    $510.51 – year 6

    $536.04 – year 7

    $562.84 – year 8

    $590.98 – year 9

    $620.53 – year 10

    $651.56 – year 11

    $684.14 – year 12



    $400,000.00 – Mortgage total

    interest only – repayment type

    $2,000.00 – monthly repayments

    6% – interest rate

    25 years – loan term

    Profile photo of Richard TaylorRichard Taylor
    Join Date: 2003
    Post Count: 12,024

    I agree i prefer to buy ppositvelty geared property from Day 1.

    If the property isnt positvely geared then there are a few strategies to increase the return.

    Everyone to their own but i prefered to use my positive cash flow to pay down my loans secured against my buy and holds.


    Yours in Finance

    Richard Taylor | Australia's leading private lender

    Profile photo of EmilEmil
    Join Date: 2012
    Post Count: 26

    Hi there,

    A 5% yield is good news. Darwin and Perth rank as having a 6% yield, the highest in the country, so your property from Victoria is doing very well. Besides that, cash flow is also influenced by depreciation. For best results, work with a specialised company to maximise your tax deductions. Also, contract a savvy mortgage broker for a good loan. When these two factors successfully combine, you get positive gearing.



    Sunbuild Invest

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