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.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.
Tom@SadhanaConstructions | Sadhana Constructions
http:\\www.sadhanaconstructions.com.au
Email Me | Phone MePerth builders of developments and bespoke homes
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 | Australia's leading private lender
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.
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://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
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