Just wanted to clarify. Is yield on a property the rent as a %age of the value of the property per year irrelevant of what out goings you have on the property and the cash flow refers to what you have left from the rent after all expenses are paid. If you have to top up to pay the mortgage that is considered a cash flow negative property and if you have a bit left over that is a cash flow positive property. I'm fairly confident I'm right but could that be cleared up for me?
Gross yield is annual rent as a percentage of property price.
Net yield is (annual rent minus bills) as a percentage of property price.
If you have to top up the mortgage yes, that is cashflow negative.
If there is surplus, yes, it is cashflow positive.
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
yes yield is calculated as ;
RENT p.w x 52 (weeks) (or less depending on vacancy rate in suburb, e.g – 51 weeks with a 2% vacancy rate)
= annual rent
then
annual rent x purchase price x 100 = Yield as a percentage, so
Rent x 52 = Annual Rent divide by Purchase Price x 100 = Yield %
500 x 52 = 26000 divide by 400,000 x 100 = 6.5%
yes cashflow positive is normally considered if money is in your pocket after interest, rates, and all other outgoings.
be wary as some spruikers and agents will call some properties cashflow positive after factoring in depreciation and not all expenses and rates, I prefer to leave out depreciation when calculating if something will be cf+ gives me extra buffer anyway.
Thanks all. That was my query. So if we look at the figures above as realistic figures, how can people ever achieve the minimum 7% yield that I hear Nathan Birch saying he only invests in? I was led to believe that your property price roughly is your weekly rent price.. ie $400k purchase will generate $400 per week.
Paterson it is called smoke, mirrors and a touch of magic.
All boils down to how you manufacture equity once you purchase the property and increase the return..
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Paterson it is called smoke, mirrors and a touch of magic.
All boils down to how you manufacture equity once you purchase the property and increase the return..
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
If you purchased something for $400k and the rent was only $400 per week, the rent wouldn't be sufficient to cover the mortgage interest and the bills.
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
Hi Paterson,
Quote:Is yield on a property the rent as a %age of the value of the property per year irrelevant of what out goings you have on the property ?Yes, that is Gross Yield as JacM mentioned. Gross Yield is typically a good "starting point" when considering purchase. It can guide you to say "I can't pay more than $xyz else the Yield is too low to work for me". Maybe such a thought can help you pick up a property for a better price, or have you walk if that can't happen…..
But then, think about what happens after a reno….. If the reno was only to make it rentable (thus the rent might not increase, yet the value will) your yield drops – or does it really???? Have a play with the numbers, and you will begin to see that Nett Yield is far more useful once you are into a property.
Quote:I was led to believe that your property price roughly is your weekly rent price.. ie $400k purchase will generate $400 per week. – See more at: https://www.propertyinvesting.com/forums/help-needed/4349301#new At one time that rough price you mentioned (a 5% return roughly) was likely "near enough" to allow disparate people able to discuss a complex subject at a BBQ using "common ground assumptions/facts?" But times change and cycles move on.
Also, some areas might typically generate WAY less than 5% even in the good times, while other areas might generate way better than 5%, even in hard times…..
Good on you for asking questions too, Paterson. Better to be sure of your facts by asking than to assume you have got them sussed, eh?
Benny
People will become tired of me asking questions no doubt. Receiving the answers gives me the pieces to the jigsaw but getting those answers to stick to hard memory is the next step and during that process I am bound to cover ground two or three times and I expect that people will find that tiring but hey ho, I cant please all the people all of the time. I'm a good guy and will pay it forward when I can so if you can all just bear with me during this learning process I will be eternally grateful. I have learnt so much in just the last week since I found this site that I'm looking forward to what I know in a years time when I do make the move.
Another thought in this process which I am sure you will all be familiar with is how much do actually have invested in the investment? What I mean is, if I have put $30k down on a $250k property, and have the rest on interest only mortgage, my liability is for the full amount of course but my investment is only the $30k and if I have generated that from releasing equity on another investment property then the risk is even less.. Am I understanding this correctly? On that basis my return on investment is based on the net rent return against the deposit, is that right?
Just wanted to thank you all again for the advice, I know you don't have to do it so I'm really grateful that you do.
Hi again, Paterson,
You're really getting into this – good to see. Another seriously good question – I'll see if I can do it justice….
Paterson wrote:if I have put $30k down on a $250k property, and have the rest on interest only mortgage, my liability is for the full amount of course but my investment is only the $30k and if I have generated that from releasing equity on another investment property then the risk is even less.. Am I understanding this correctly? On that basis my return on investment is based on the net rent return against the deposit, is that right?– See more at: https://www.propertyinvesting.com/forums/help-needed/4349301#comment-294953
I believe that is called a "cash-on-cash return". And it is a valid consideration too, up to a point. But it does leave out the other hidden costs – opportunity cost, loss of interest cost, etc. Imagine when you reach the stage where you pull ONLY equity to purchase and put just $1000 on a contract to purchase – your "cash-on-cash returns" will be in the stratosphere……
It is always useful to realise that the other borrowed money could have been an opportunity to invest in shares, oil paintings, etc. Thus by utilising that equity, the monies (that WEREN'T cash-down on the property) still impact. That is called an Opportunity Cost. And, if it was equity released from a sale (so, no mortgage interest paid) then it IS cash-down, isn't it? However, if you won Lotto, then it doesn't have the same "cash down" impact, but it DOES have that "opportunity cost" (as you could have invested it in shares…..).
In short then, I believe the extra $220k should be considered as an "investment cost", at least to the extent of the mortgage monies paid Monthly, along with Borrowing Costs (stamp duties, application fees, etc). However, your thoughts lead me to offer a little more – first, let's assume that the gross yield on this place is 7% (thus, the rental income is ~$336 a week).
If you now compare the "cash-on-cash return", rather than Nett Yield, then you are pulling $17,500 in rent, and let's assume $1500 a year on Insurance, maintenance, rates, PM fees, etc. Let's also say that your Mortgage Interest (IO) is 5% (so $11000 pa). You would then be left with a Nett cash return of $5000pa on a "cash down" amount of $30k. A "cash-on-cash" return of 16.6% then, and it sounds much better than the initial 7% eh?
Personally, I have always worked things out as if I have "borrowed 100% of the property cost". If the numbers still work with 100% in, then it's all good. I'm sure others have their ways that may well differ too. I'll be interested to read how others do this,
Benny
I always count ALL costs which usually amount to 105% (purchase, stamp duty, solicitors fees). I borrow all of it.
The $400,000 with $400 a week rent was used years ago but now people chasing yield want more as it's a negatively geared property.
Even 7% will be negative normally. Nathan buys under market so that's why he can get 7% yield. Sometimes he'll do a reno to increase yield. That's what we do, buy a place, do a reno and it is then CF neutral at worse from day 1 with increased equity. After the reno (including all costs) our last one was 8.9% yield.
Benny your answer is very understandable. I couldn't explain it to anyone else just yet but I get the principle. Thanks
Catalyst, I like your thoughts, to evaluate from the point of view of including the borrowed sum since you are liable for it.
So I need to know how to increase the value and the profit of the property just like an investor in companies needs to know how to increase the productivity and profit of the company he has shares in to produce dividends and growth, and that is where market research and market knowledge comes in. Knowing the area is on the move for the capital growth and knowing the area to know what the rates of rent are and if you can increase them somehow.
Cool, I feel like I can glue that piece of the jigsaw down now. I'm confident I see where it fits into the big picture. We're getting there.
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