All Topics / Help Needed! / Confused by calculation in current YIP magazine

Viewing 5 posts - 1 through 5 (of 5 total)
  • Profile photo of brettc4brettc4
    Participant
    @brettc4
    Join Date: 2007
    Post Count: 20

    I have been reading the Story ‘Replace Your Income’ in the June issue of Your Investment Property and the calculations and assumptions used are confusing me, I am hoping someone can help explain them to me, or let me know where the assumptions/calculations are wrong.

    On Page 30, they are setting a Goal, $120,000 net income. They assume a Rental Yield of 5% which means $2.4m in asset (they then add some additional costs so say assets of $3m is the target).

    On page 36 when talking about the exit strategy, they say they have assumed 6% capital Growth, and rental increases of 3%.
    So if I quickly run some numbers I come up with a scenario like this:

    Year 0
    Purchase Price: $500,000
    Rent: $480 p/w
    Yield: 5%

    Year 10 – using the growth rates above
    Value: 895,500
    Rent: 645 p/w
    Yield: 3.75%

    As the growth rates are different your rental yield drops.
    How can they then assume (as they do when setting up the example and in the final table on page 39), that their total asset pool can yield 5%.

    When you picture an end game, does your Capital and rent grow at the same rate, of are you assuming yields will drop over time, in which case, the equity you need will increase to achieve the income you want?

    Thanks,
    Brett – A newbie who is still can’t pull the trigger to buy by first Investment Property.

    Profile photo of Tom@SadhanaConstructions[email protected]
    Participant
    @spartantom
    Join Date: 2015
    Post Count: 18

    Whoa, I wouldn’t worry too much about trying to figure out the exact nuts and bolts of what they’ve worked out. Take it at face value that your rents will probably increase over time as likely will the value of the property.

    As the value of the property increases, sure your yield may decrease if your rent doesn’t keep pace. For simplicity sake, if you owe $100k in year 1 on a property valued at $100k and your rental income is $10k, your yield will be 10%. If in year 10 you still owe $100k (assuming interest only), the value of the property is $200k and your rent has increased to $30k, your yield will have increased to 15%. If however your rent has only increased to $15k, then yes your yield will have decreased to 7.5%

    It’s like anything though, you can analyse it to death trying to micro manage the details but the guys who are making money are out there investing not worrying if their yield is exactly keeping pace with the uplift of value in their property. Sure they probably have a good understanding of yield and growth rates etc, but more than likely they learnt this on the fly through actually investing. You’ll always learn better from a hands on experience rather than analysing an article.

    [email protected] | Sadhana Constructions
    http:\\www.sadhanaconstructions.com.au
    Email Me | Phone Me

    Perth builders of developments and bespoke homes

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,024

    Hi Brett

    Welcome to the forum and I hope you enjoy your time with us.

    If you shoot me an email I can send you my interview I gave the API magazine on how I retired at 40 living off my rental income from property.

    You need to apply a number of strategies going forward but you have to start somewhere.

    A simple Buy & Hold will get you moving but be aware of what else is out there.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me | Phone Me

    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of CatalystCatalyst
    Participant
    @catalyst
    Join Date: 2008
    Post Count: 1,404

    Good on you for analysing it. Lots of people just read this stuff and believe everything they read.

    But-

    YOUR rental yield hasn’t dropped because you paid $500K. So your rental yield has increased.

    If someone 10 years later was buying that property THEIR rental yield would be lower. But who cares about them! Haha!

    Capital and rent won’t increase the same. The both go in cycles but not at the same time.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    How can they then assume (as they do when setting up the example and in the final table on page 39), that their total asset pool can yield 5%.

    The beauty with these sorts of projections is you can make things up to suit the desired outcome. Doesn’t mean things will pay out like this , but it sounds good.

    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/

Viewing 5 posts - 1 through 5 (of 5 total)

You must be logged in to reply to this topic. If you don't have an account, you can register here.