Hi All,
When you're calculating yield on a property you own, should you use the price you bought it at e.g. $300,000 (7.8%), or the market value now – (10 years down the line) $600,000 (3.98%)?
Thx
Swampy
Hi Swampy,
When calculating yields to compare between different properties I would use the information that is available today… With so many confounding factors it is difficult to predict what the market value of properties will be 5yrs, 10yrs, 20yrs from now… Furthermore yields are based on both the value and the income of the property i.e. if the income rises at the same rate as the price, then the yield will remain the same despite the property doubling in value. Many investors use yields to help determine where to put their money
E.g. an investor may have a rule where they only invest in properties that yield at least 10%. They start off by buying a house at 10% yield. 3 yrs from now, the value of the house doubles, but the income does not, thus yielding 5%. He/she then decides to sell the house and use the proceeds to purchase 2 other properties with 10% yields
Hope that helps
Kong
In the case you showed above, your value has doubled, but your yield has dropped in half – the question is, would your money be better off elsewhere? (Can you get a return better than 3.98% elsewhere?)
Current yield is the one to use., as this is your measure of how your investment is performing.
Hi Swampy,
Just another idea that I use for when I look at my current IP to how I calculate the yield for a new IP. Some people disagree with my method and some people understand what I am saying but still may not agree. lol. This is just how I do it – right or wrong – it is up to each individual to make that decision. ( I see my wife shaking her head as that is a fav saying of mine
).Properties I have held for lenghy periods of times I calculate at the original price to what I am receiving in rent now. So from that investment, that is how much my "money" is earning. Yet with the increased equity from this, I have used to buy other property and a business. Eg Purchased unit 10 years ago as mortgagee in possession for $65,000 and was rented out for $120PW. Eighteen months ago I spent approx $10,000 to update the unit and rented it out at $250. Current rent is $255. So initially my return at $65,000 for $120PW rent was 9.6%. Now my current return is $65,000 plus $10,000 on updates totaling $75,000 at $255PW rent is 17.68%. The current value of the property 18 months ago after reno was $225,000. I am in the middle of another valuationt o see how much it has increased for us to move forward with another IP.
ATM my wife and I are looking at purchasing another IP. So we look at the yield in the asking price to the rent recieved. Again it has to be close to 10%.
Hope this gives another slant to how to do these calculations.
Have a great day
Michael
I agree with Michael, you can look at it in many ways and it will provide different insights.
‘Yield’ is a return on something. There are different somethings.
Michael’s first example, based on what he originally paid, is a yield calculation of the return on his capital employed. The later example is a yield calculation of the return on assets (at current market value) They’re both good to know.Mostly people use yield in the context of return on current asset value, so that they can compare like with like.
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