Hi folks , I am getting told recently that it is a waste of time
investing in commercial property around Perth at present
only bringing 3.5 to 5.5 % just comparing purchase price to
rental income . But wouldn't one consider that if I borrowed most
of the money , the return figure would be better because, I would
be using other people's money( the bank's). So the comparison
would be the rent return on lesser input of my own capital.
Comments please if I am or not on the right track of thinking.
In a basic number crunch on a prospective investment, if the rent return is below the finance cost (interest) then it's already looking a bit shaky in my book.
I wouldn't buy any sort of property on a 3-5% rent return. Today's finance is at 8% roughly. There's a big neg cashflow there, and you don't know how much if any cap growth you'll get. Very risky.
But, as you said; the more you borrow, and the less you put in, the greater the Return On Investment (ROI).
So, a quick example for you:
If you bought a resi property for $200k, and only put in 10% deposit plus costs in cash (costs for resi property are usually around 6%) = $32k.
Keep in mind that often with Commercial property, you will be required to put in more deposit and often the interest rates can be higher. The good news is that the holding costs are usually lower as the tenant usually pays for things like rates and insurance.
Say rent is at 7%, and after all holding costs, all tax returns and depreciation are factored in you have a neg cashflow of $10 per week.
After 10 years the property has grown in value to $400k.
So, overall figure is:
Cap growth: $200,000
Cashflow: -$ 5,200Total = $ 194,800
Divided by 10 years this is $19,480 per year.
Return on Investment is cash input, divided by total, multiplied by 100.
ROI = $164.2% or $16.42% per year.
Not bad.
The Perth A Grade commercial market is quite tight at present and there is very little new stock coming on the market (either under construction or being planned). The new train line in the centre of Perth will also drive demand for well located property (near Hay/Murray St malls).
Read and understand the lease which is in place, lease term remaining, options aren't a given, the type of rent reviews and lessee/lessor obligations.
Hi goldengoose, you're absolutely right to think in terms of the return on YOUR money, rather than the gross return on the overall asset. But where your thinking may not be crystal clear is that leverage (using as little of your own money as possible) only magnifies any profit or loss – it never turns a loss into a profit or vice-versa.
So if your finance costs 8% and you're earning 4.5% in rental income, you HAVE to obtain a capital growth of 3.5% per annum to break even. If you only get, say, 1.5% capital growth, then your overall asset has "lost" 2% that year. If you only put in 10% of the money and borrowed 90%, the lender doesn't share any of that loss, so in fact you would have 20% of YOUR investment. (ie You lost 2 of the 10 pc that you put in.)
But on the other hand, if you earned 5.5% capital growth, your overall asset has profited 2% that year, which you don't have to share with the lender either, and therefore you've EARNED 20% on the funds that YOU invested (ie your 10% has increased by 2%.)
This is simplified, of course: you have to take into account the fact that capital gains dollars are more tax-effective than income dollars (due to 50% CGT concession if held > 12 months), and that you don't have to pay 8% interest on the 10% equity that you put in etc, but these are relatively minor matters in the big scheme of thing and I believe this simple example adequately demonstrates the principles.
Best wishes!
Tracey in Brisbane
Hint – if it is negatively geared, it is COSTING YOU MONEY & vice versa. Tax offsets only improve your situation (at some point in time).
Trakka, sure you must consider ROI on your investment but you must also consider ROI of the entire asset, if you have a good performing asset (remember, you may actually own the whole asset at some stage of its life), then your ROI on your capital will be much greater.
Good morning, Scott. Yes, it depends entirely on your strategy. I intend to always be leveraged as highly as possible, and only ever take interest-only loans, so for me return on my investment is far more important than the ROI of the overall asset.
For example, let's assume that I have $50K, and I'm looking at a commercial asset whose overall ROI is 12% (say, 8% growth and 4% rental yield), and a residential asset whose overall ROI is 10% (nominally 7% growth and 3% rental yield). Being aggressive, I can borrow 80% for the commercial property, and 95% for the residential.
So my $50K will let me buy either:
1) a commercial property worth $250K returning $20K capital growth and $10K rental income, or a total of $30K on my $50K invested, or 60% in the first year.
2) a residential property worth $1M returning $70K in capital growth and $30K rental income, or a total of $100K on my $50K invested, or 200% in the first year.If you don't go to max LVR, then sure, ROI on the overall asset is important. But for somebody like me who likes to keep things fully drawn and pay interest only, this is the way that I consider alternative investments…
I hope this has clarified the context in which I gave my previous comment to goldengoose. Thanks for making me think it through clearly, Scott.
Tracey, it is a much more likely scenario that you would be getting your 12% on your commercial property based on a 4% growth/8% rental yield with CPI/4% growth and this would affect your equation as follows:
Commercial Ppty – $250k yielding $10k capital gwth & $20k nett rent. This would result in +ve cashflow from day 1 (at the right interest rate of course) plus capital growth. The annual cpi rent review would maintain the yield at about 8%.
Neither commercial property, nor any other property, is ever valued on its two yield components as this gives a skewed result (this method does not comply with the API guidelines). It is impractical and misleading to value land using such a method. A DCF takes the purchase and sale price into account to reveal the IRR & NPV, and the secondary methodology of comparable values will arrive at the value of the asset only.
Thankyou very much for the input so far folks ,
especially factoring bank interestalthough is tax deductible, intially I
have to pay it .
I am surrounded by a very negative thinking
family , makes clear thinking difficult .
Cheers .Hi Goldengoose know exactly what you mean when it comes to negative thinking people. I came to this realisation a couple of years ago, I do not talk to people about my investing unless they are doing what I am doing or are where I want to be in my investing journey. This saves a lot of time and energy because there is nothing worse than someone giving you advice about something they know nothing about.
Your with good company on this forum.
Ros
Scott No Mates wrote:Tracey, it is a much more likely scenario that you would be getting your 12% on your commercial property based on a 4% growth/8% rental yield with CPI/4% growth
The way that I consider these things, it really doesn't matter. I usually fund any negative cashflow from equity, so which dollars are capital growth and which are rental income doesn't make a difference using the method that I presented.
Scott No Mates wrote:Neither commercial property, nor any other property, is ever valued on its two yield components as this gives a skewed result (this method does not comply with the API guidelines). It is impractical and misleading to value land using such a method. A DCF takes the purchase and sale price into account to reveal the IRR & NPV, and the secondary methodology of comparable values will arrive at the value of the asset only.
I was using a simple example to demonstrate a method that I use to compare investments, and why I might consider a property with a low rental yield a worthwhile investment. I'm entitled to my opinion, and didn't present myself as a valuer. Chill!Regards, Tracey in Brisbane
Tracey, I am just presenting the traditional/commonly accepted approach to these things. Each investor will weigh their decisions differently (rightly or wrongly) and invest according to their philosophy. In my book, cashflow is king when valuing an income producing property, hence a negatively geared property has a negative return on investment (unless you factor in the intangible capital growth which is realised upon refinancing or sale).
I didn't once suspect that you were a valuer (or had any idea in regard to accepted valuation methodology).
hi – excuse the ignorance but could someone help explain:
1) ignoring capital yield, what % rental yield would a person seek when searching for a potential ip? if in the current market the cost of finance is approx 8% ? i assume anything less than this would look unfavourable.
2) following on from question 1, assume then we accept nothing less than 8% in rental yield for a property, by doing the sums this would mean for a standard $450k property, you would expect a weekly of rent of no less than $692 p/wk. Im no expert, but that to me sounds highly unlikely.
3) For arguments sake, lets assume now then, 4% rental yield and 4% cap yield. Even at these rates, you would expect weekly rent of $346. However even these rental rates, from what ive seen in the papers etc is extremely high and unlikely?
4) Then theres the notion that property values will double every 7-10 years. Assume then a $450k property will double in 10years to $900k. Are we then, therefore saying that the salaries of the country will also increase in a manner relative to this rate? and at the same time, so will costs of fuel, etc basic commodities.?
Pirate,
everyone has a different idea of what is a good rental return.
I heard today of someone buying a $600k property with a 2.8% yield.As I am a primarily cashflow first, cap growth second investor, this is madness to me. That person is now a slave to very neg geared property unless they put in a huge deposit (unlikely), and there is no guarantee of a good cap gain with it.
So, you need to ignore all the opinions and decide what you want to do. If you are struggling for freed up cash to fund a neg cashflow, then you need to maximise the cashflow as much as possible. This may mean not settling for less than what the cost of finance is at the moment. You may want to only settle for 8% or more yield.
This is very difficult to find in cap cities, so it may mean looking at regional/country areas, or try to add value and cashflow through renos that will allow an increase in rent.
The average is that property doubles in value every 7-10 years, but there are cycles where the cap growth can be nothing for years, then a spike of growth.
It is also quite possible to do well above the average if you are experienced and have knowledge.
Also, don't look at a standard price of $450k. There are many different price points for properties, and you will usually find that as the purchase price increases, the rental yield doesn't. You will usually do better with cheaper properties for cashflow and rental yield, and quite ofetn with cap growth as well.
Keep you mind open
pirate wrote:hi – excuse the ignorance but could someone help explain:
1) ignoring capital yield, what % rental yield would a person seek when searching for a potential ip? if in the current market the cost of finance is approx 8% ? i assume anything less than this would look unfavourable.
2) following on from question 1, assume then we accept nothing less than 8% in rental yield for a property, by doing the sums this would mean for a standard $450k property, you would expect a weekly of rent of no less than $692 p/wk. Im no expert, but that to me sounds highly unlikely.
3) For arguments sake, lets assume now then, 4% rental yield and 4% cap yield. Even at these rates, you would expect weekly rent of $346. However even these rental rates, from what ive seen in the papers etc is extremely high and unlikely?
4) Then theres the notion that property values will double every 7-10 years. Assume then a $450k property will double in 10years to $900k. Are we then, therefore saying that the salaries of the country will also increase in a manner relative to this rate? and at the same time, so will costs of fuel, etc basic commodities.?
1)I have a unit in surfers paradise which achieves a rental yield of 8.5% based on a purchase price of the unit, but based on the loan amount its actually 9.5% yield. We bought this apartment this Feb 2007 so its just before the mini boom in gold coast prices. You can still get the same apartment for about 20-30 grand more and the rental yield would be about 7.4% which is still fairly good for todays standards. Answering your question though, i'd say anything 4-5 % is quite exceptable in the current market. However if you put more of your own money in it rental yield will obviously be higher. The only type of properties you can buy now returning higher then 8% are probably student accommodation style apartments and townhouses. Varsity lakes area in the gold coast is a good example of this. Not sure what the capital gains are like in this area but rental yields are really good.
2)As above, student accommodation is probably best best, but $692/ week on a long term tenant is highly unlikely. Only way of achieveing this is through holiday rentals. Sites such as http://www.stayz.com.au allow you to manage your own holiday house for a little fee.
3)I think $346 for a 450K place in a good suburb is achievable. If you hold on to the property for longer you should be getting a higher average gain then 4% pa if your buying in a decent suburb. Your cashflow is going to determine how long you can hold this property for. Try get a line of credit if you can to help pay off mortgage repayments and any rates or body corp fees etc when needed(much better rate then credit card). I'm trying to get one next year to help pay off things when money gets a bit tight.
4)Not sure the answer to this. Not much of a finance expert
pirate wrote:hi – excuse the ignorance but could someone help explain:
1) ignoring capital yield, what % rental yield would a person seek when searching for a potential ip? if in the current market the cost of finance is approx 8% ? i assume anything less than this would look unfavourable.
What type of IP (resi/comm/ind) – each market has a different yield associated with risk & your risk profile. It is fairly unlikely that you will find net yields above 8% unless you are looking at some extremely run down properties (quick fix) or larger scale industrial/commercial sites (>$3m in regional areas).
pirate wrote:2) following on from question 1, assume then we accept nothing less than 8% in rental yield for a property, by doing the sums this would mean for a standard $450k property, you would expect a weekly of rent of no less than $692 p/wk. Im no expert, but that to me sounds highly unlikely.Once again, it depends on the condition that you purchase the property, how much work is required to bring it up to a 'lettable' standard for its market.
pirate wrote:3) For arguments sake, lets assume now then, 4% rental yield and 4% cap yield. Even at these rates, you would expect weekly rent of $346. However even these rental rates, from what ive seen in the papers etc is extremely high and unlikely?As per part 2.
pirate wrote:4) Then theres the notion that property values will double every 7-10 years. Assume then a $450k property will double in 10years to $900k. Are we then, therefore saying that the salaries of the country will also increase in a manner relative to this rate? and at the same time, so will costs of fuel, etc basic commodities.?Yield will remain a relative constant subject to the spikes in market conditions then there are subsequent corrections.
Thanks for the replies. Its been interesting to see the different perspectives.
another other quick one:
1) does the 'on average properties double every 7-10 years' rule apply to all properties alike? eg, duplex/houses/villas? just curious on why theres a house vs duplex/unit debate
2) just keepign on track with original post: say if a potential ip was $350k, rents of $300p/wk. would roi then be 4.5%
Breammaster wrote:1)I have a unit in surfers paradise which achieves a rental yield of 8.5% based on a purchase price of the unit, but based on the loan amount its actually 9.5% yield. We bought this apartment this Feb 2007 so its just before the mini boom in gold coast prices. You can still get the same apartment for about 20-30 grand more and the rental yield would be about 7.4% which is still fairly good for todays standards. Answering your question though, i'd say anything 4-5 % is quite exceptable in the current market.Hi Breammaster. Can you tell me where these units are in surfers with that yield? Are they holiday renals or long term tenanted?
Ive been looking in Brisbane for that kind of thing and those yields don't exist up there.
CheersHi
I'm glad to have found some investors with Gold Coast experience – so I'm latching on with a few questions here.
Does anyone have experience with the Azzura Group? or looked at the opportunities they offer – in comparison to other property investment available in the same area eg are the deals competitive?
I'm interested in finding out more – about the IPs they have available to investors.In general (Gold Coast areas) what sort of net yields are investors getting for IP there, once management fees, expenses etc are paid.
Any comments, and views along these lines would be helpful.
Amil
perryjudd wrote:Breammaster wrote:1)I have a unit in surfers paradise which achieves a rental yield of 8.5% based on a purchase price of the unit, but based on the loan amount its actually 9.5% yield. We bought this apartment this Feb 2007 so its just before the mini boom in gold coast prices. You can still get the same apartment for about 20-30 grand more and the rental yield would be about 7.4% which is still fairly good for todays standards. Answering your question though, i'd say anything 4-5 % is quite exceptable in the current market.Hi Breammaster. Can you tell me where these units are in surfers with that yield? Are they holiday renals or long term tenanted?
Ive been looking in Brisbane for that kind of thing and those yields don't exist up there.
CheersThese units are long term tenanted but have option for holiday rentals.
Try Paradise Island resort in surfers. Its currently the best value for money in terms of units at the moment in surfers. You can get a 1 bedroom unit for around 200-210K(For now that is) with a return of about 270-290/week. Not sure how long it will stay at this price. I have been following the prices of units in gold coast for the past year and this resort would have to be one of the best investments up there if you are after units. There are a few other ones in broadbeach and which cost about 20K more and offer the same return per week(about $280/week) and body corp is probably about an extra $30 a week. Try these if you cant get one a paradise island.Breammaster
What sorts of costs are there on the holiday rentals? Cleaning, letting fee, management fee, & how are these determined/rates increased?
SNM
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