Hi everyone,
I am looking to invest a spare $80 000 dollars at the moment (after selling one property and bought another one). At this point I am not yet comfortable investing in regional areas not sure it is the best option for us since we both work and positive cash flow won’t be at great benefit for us.
I have been searching for a small apartment in city of Melbourne (not Dockland area) and not sure what they mean with properties that have 7% yields.
Is it a persentage of the rent based on the sell price or this it clear profit per year after deducting the cost associated with the property?Any other ideas on what and where I can invest this money will be welcome.
I have found a few places where the rent return is very good (of course it does not meet the 11 second rule.Hi Maggie,
I’m not meaning to sound rude, but how do you know the rental return is good if you’re not sure of the definition of “yield”? The 11 second solution basically works out whether the property will give a 10.4% yield, ie cost 50k, rent 100k, annual rent = 5200k/puchase cost of 50000k = 10.4%…
I wouldn’t be in a rush to invest until you’re sure on your knowledge base.
Cheers
rHi Richmond,
Thank you for your input.
I know that return is good by looking on the price and compare it with the rent. If the rent is enough to cover the interest and all associated cost I am happy with it.
It was not clear to me if the yield % is before you pay tax or after.Thank you anyway
Forgot to add:
Do you take into account the stamp duty, solicitor’s fees insurance rates and so on, when you calculate.
Maggie
you factor in things like solicitors fees, stamp duty etc when you’re working out your cash on cash return… if you do a search for “cash on cash” or something like that you’ll find posts where greater minds than mine (like Michael and Kaye) have contributed…
also, it might help to give us the purchase price, along with the likely rent, so we can flesh it out a bit more …
cheers
rThanks,
The property is studio apartment.
The price is $115 000/$120 000.
Rent $184 per week.Maggie
That’s a yield of 7.97% (if bought at 120k)… not bad I would have thought, but what about extra costs like body corp etc, is there any of those? they eat into your yield pretty quick.
cheers
rI will investigate this further.
Just today I really thought of buying something like that in the city.
Everyone is saying that apartments in the city are not good investment at the moment as the prices are expecting to fall.
Is that really the case, not sure? I don’t think especially with the cheap once.
What are your thoughts on that?Maggie
Being a Melburnian, I think the main issue is that the rental demand is not there… there’s a lot of apartments sitting around vacant. I have a mate at work who is looking for an apartment to live right now, and he is amazed at how many places are available for lease.
cheers
rToo many apartments in the city and too much vacancy,absolutely no land value.
Well if you really want to go ahead, check body corp minutes and sinking fund issues, in case there are lurking any nasty repair bills.
In my books, and from past experience, I now stick to the cliched “mum and dad” property, eg suburban house and land, close to facilities, this is were mostly home owners and not investors buy, I also buy for the subdivision potential of the land.Thank you all guys,
I did check it and it turn out to be more like a hotel accommodation and the corp. fees are high so it is not for me.
Regina,
In regards of subdivisions, we do the same. I just thought that would be good not to put all eggs in one bucket.
As you know it is very difficult and time consuming with council and thinks but the dollar is there.What do you think about these hotel accommodations? Are they worth it?
This is something you buy and forget about it, at least this is the idea.Maggie
It was not clear to me if the yield % is before you pay tax or after.
Maggie your question hasn’t really been explicitly answered properly. I know Richmond has effectively answered you by his example, but the simple answer is that yield is just the gross yield, or “Gross Rental Return”, ie simply the rent per year divided by the purchase price. Steve quotes a figure of 10.4% being roughly what is necessary to achieve positive cash flow, after all the rates, interest and maintenance have been taken out. I, as a negative gearer (well that’s how I’ve started anyway) will usually strive for a gross rental return of 6 to 7 % on a new property, which together with the tax benefit of claiming for depreciaiton is just enough to keep me cash flow positive after tax.
Jim.Regina, I know you like suburban houses, but I know some investors prefer new 2-3 brm units or townhouses, within a 3 to 7 km radius from the cbd. One of the reasons they give is that the unit represents a larger proportion of the cost of the property (smaller land area) and hence achieves a greater depreciation to purchase price ratio. This effectively increases the total number of properties they can purchase.
It’s always a balance between cash flow and capital gain expectation I suppose.
Jim.Maggie,
Yield is commonly calculated by multiplying the weekly rent by 52 then dividing it by the purchase price. Then multiply by 100.
ie 200 x 52/200 000 x 100
where $200pw is the rent and $200 000 the purchase price.
In this case no outgoings are deducted.
There is software available where all the information can be plugged in and a spreadsheet will show the result per week.
I hope this helps
This is no magic formula. Just a quick method of comparison.
Cheers,
Simon Macks
Mortgage Hunter
[email protected]
0425 228 985Hi Maggie,
wow, the first person I’ve met in my whole life who said “positive cash flow won’t be at great benefit for us.”
hehe!!! but I think I get what you mean, which is, that if an investment pays off later it’s OK if it doesn’t pay off now, i.e. negatively geared properties for capital growth?
the problem is that the capital gain part is not guaranteed – prices might go down. like everyone is screaming around here.
And so would you be prepared to buy a property that not only lost money each week but could quite possibly go down in value, at least for the shorter term?
If so then go for it.> not sure what they mean with properties that have 7% >yields.
It’s a bit like interest rates – put cash in the bank, the bank pays you 3 percent or whatever the going rate is, borrow money and the bank *charges* you 6 percent.
So your yield is like your ‘return’ or the percentage of the purchase price you recoup every year.>Is it a persentage of the rent based on the sell price
yep> or this it clear profit per year after deducting the cost >associated with the property?
don’t think so although they are always advertising IPs for sale where the vendor ‘works it all out for you’ and writes it into a glossy brochure. In those cases take the calculations with a huge pinch of salt , if stories on this forum are anything to go by
>I have found a few places where the rent return is very good >of course it does not meet the 11 second rule.
i think the real problem is that people these days seem to think a rental return of less than 10.4 percent is ‘very good’.
mmm. brings us back to the question of whether you can rely upon capital growth to do what you want it to dojim – they say ‘land appreciates, buildings depreciate’. i get the concept of depreciation of course- you can write stuff off and save tax etc but it’s not actual income, it’s actual losses made to look OK on paper.
Re “This effectively increases the total number of properties they can purchase. ” I would have thought the opposite is true for negatively geared properties, cause you can only save so much tax…also losing $1 now to save 48 cents in the future, i don’t really get
I just read all your responses and just felt to quickly answer.
I did say that at the moment positive cash flow won’t be at any benefit to us is simply because our income is already too high so let’s say we have 1 IP cash positive bringing us 50 a week we will only see 25 of it with no or little chance of bringing us any capital growth in the future.
In the other hand if we have negative one we will benefit in terms of cash just about the same but with the chance of that property to have capital growth in the future.
So my thought are that while we are full time workers not very beneficial having cash + properties. I guess if we start buying such properties we should really think of cutting our hours at work.
Yes, I know everyone is saying about the market crush but when you buy property and it is for a long term this is not an issue.
I might be wrong, guys but I feel much more insecure buying property in those little regional town where could be simply impossible to sell if you need to and with no potential.Today an agent call me about a flat in the city and said that the return on it is 7.5% of course did not tell me about the hidden cost that I have to pay after that.
This is all very interesting and I am learning about cash + IP’s everyday and it does not mean that if I find something suitable I won’t buy it. I will keep my eyes open and keep reading this forum.
wish you all luck
CheersSpot on Maggie,
Many people believe one has to sacrifice growth potential for pos cashflow.
There are many styles of investing and I believe you need to look at everything out there and make your own call!
And you are well on the path to do this!
Cheers,
Simon Macks
Mortgage Hunter
[email protected]
0425 228 985Hi Mini, I know what you are saying. I can only respond by saying that obviously we negative gearers are taking a bit of a punt. The punt is that the properties we control will achieve enough capital gain to make it all worthwhile. The depreciation is crucial to making it work. We have to be able to be able to keep our head above water until the rent goes up a enough to take up the slack when the depreciation runs out, and the depreciated stuff needs replacing.
Obviously it will be less effective if you are not operating in at least the 43.5% tax bracket, so it becomes an interesting balance of when you buy and how often you buy new properties, eg one per year. It’s also possible to be a bit creative with timing of buying and selling. Eg I bought 4 properties when I had to sell my shares in my company which resulted in a big CG event, so all my initial depreciation was offset at the max tax bracket. Similarly I would consider selling one of my properties that has a reasonable capital gain, and buying more properties in the same F/Year. The initial depreciation can be quite substantial eg $9,000 due to all the items less than $300 being depreciated 100%, and the effect of the diminishing value method for the rest. It’s mathematically much better to get as much depreciation as you can, as early as you can, working in the max tax bracket if possible. The tax man is refunding me todays precious dollars (only half of) which I will have to pay back in 25 years or so, with crummy little dollars that will barely be worth picking up off the ground!
It’s all a bit of a game!
Jim.
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