Hi All,
I have had an investment property for quite a while however only now am I starting to look at the viability of my property in terms of investment return.
The Gross Yield of my property, based on purchase price, is 10.7% (currently 4.9%) and my net yield is currently 4%.
My question is for all the professional investors… what should I compare my return to, is there an index I can use or should I compare it to a term deposit rate? should I use the Gross or Net Yield?
I was thinking that I should compare it to a term deposit rate as that, for me, would be an alternative form of investment.
Thanks In Advance!
Regards
Beau
You can't compare your IP with a term deposit unless you paid 100% cash.
You need to take gearing into account.
Eg if your IP was worth $300K goes up by 6% that's a growth of of $18000. Assuming you put in 20% deposit plus legals and stamp duty (say$40K). If you invested that $40K instead at 6% you would make $2400)Please give more figures if you want more comments regarding the viability of the IP.
Eg purchase price, loan, current price, current rent.
thanks for the response.
Purchase Price – $115,000 (09/2002)
Current Value – $250,000 (as per last council tax advice)Current Rent – $12,254
Outgoings – $8,158Loan – $45,000
– Good question
So many ways to do the numbers!!!
– For arguments sake, lets pretend that
1) your loan, at time of purchase, was also 45k. And purchase costs = ZERO
2) Council valuation is correct
3) Going to disregard income / loss during years 2002 until now (we dont have the info, otherwise we would deduct it off the CG)CG = (250000-115000) = 135000
Money in = 70k
Time = 8.5 years
CG / yr = 135000/8.5 = 15882
As a % of Money in = 15882 / 70k = 22.7%Of course in the real world. You made losses in the early years (helped to a degree by a tax break, depending on tax bracket) – should take these off the CG amount shown. Also, i'm betting you didnt start with 70k in (ie 61% equity). But you gradually increased your equity over time by making principal payments.
– Of course unless you sell, these gains are tax free – and you can use the equity to do the same thing again.Going forward from here.
– This investment will pay for itself without any additional principal repayments from you.
– Alternatively your net yield (based on equity) is now (12254-8158)/(250000-45000) = 1.99%A property investor will tell you – entry and exit costs are high. So dont sell unlees you have to. Also the gain is in the capital Gain, not the net yield. (although what the future capital growth figures are is anyones guess).
Also note, if you cash out seeking a better return, you wont get 205000. As this will be subject to
1) CGT
2) selling costs.I'd be interested to hear any other comments. There does seem to be a lot of ways of crunching the numbers.
if you want to check your returns, you should benchmark by measuring net returns (excluding tax, interest etc ie ebitda) against other investments that you held over that same time eg: superannuation account, bank deposits, shares etc.
If you don’t use ebitda, you don’t have a consistent standard to measure your returns.
Scott,
could you expand a little. What is ebitda??earnings before interest, tax, depreciation, amortization.
The same way that company results are reported & compared
Why do you want to index your returns? For example for me the answer would be to see if my investment was still working as hard as other potential investments. Therefore I'd take the 'current net income'/'current equity'. Then compare that to the 'cash on cash' return available from other investments, ie 'net rent'/'cash invested'.
This way if your equity has gone up a lot, and there are good returns elsewhere, then it might be worth taking a profit to get better returns.
Taking into consideration entry and exit costs…and CGT tax etc.
You must be logged in to reply to this topic. If you don't have an account, you can register here.
