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Yield under LAQC scenario

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  • Yield under LAQC scenario

    All,
    I have read numerous posts on this forum relating to yield. I am a bit confused. When I applied calculations suggested by muppet under
    http://www.propertytalk.com/forum/showthread.php?t=3646 I found (what I already really knew) that my property is loosing me $13k per annum. I guess one would call this negative yield. However, my rental is in an LAQC and I am getting a tax refund every month and as a result my property really only costs me $3k per annum in top up payments. That particular property has appreciated about $120k in 18 months, so I guess I am not doing too badly on it, but yield seems to be a bit useless for me here. I want my properties to provide me with passive income in about 10 years. Thus I would like to ask two questions:
    1) Should one really be concerned about yield, if they can afford to buy and keep the property for 5-10 years? Or is this irrelevant?
    2) Should the tax return under LAQC be taken into account when calculating yield? This is probably a silly question because if property is making a loss then yield is negative. But I may be confused...

  • #2
    Great questions, you're going to get mixed answers (and maybe a good heated debate!).

    I try and look at the overall cashflow picture each investment generates. Yield fixation is a bit shortsighted, there's so much more to your business units (i.e. each individual property) than pure yield. R&M, vacancy, tax benefits, capital growth etc etc all form part of the big picture.

    Although revenue is critical, when doing the final analysis, no successful business ever looks purely at it's revenue/sales. It might look at them first, but will also look at the other fiscal drivers in analysing the viability of the business compared to it's goals.

    At face value I'd say you're going to achieve your goals in ten years whilst being easily able to find ways to bridge/fund around the nett shortfalls the property(s) present on paper, without going to your own pocket.

    Theoretically - assuming you don't increase borrowings and your mortgage is fixed (yes hypothetical stuff I admit!) - increasing rental incomes will surpass your outgoings over time. Exactly how much time is getting in to crystal ball territory, but some say that first four years of a long-term investment are the hardest, after that it becomes gravy. (Again, so long as your monthly rent has been ratcheting upwards, and your mortgage hasn't!).

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    • #3
      Hi Judge,

      The importance of yield (however you measure it) depends on your circumstances and your investment plan.

      If, like you, one is interested mainly in the longer term, then yield may be less important, so long as the property is a good one to keep for the long term (low maintenance, reasonable area etc.)

      However, if one is trying to escape from the J.O.B., then cashflow from property, be it from high yields or trading or whatever, becomes more important.

      Yield, rather than rental amount, is also useful in comparing properties that differ in price. Another method of comparing properties is 'return per $100,000', which is used by Kieran Trass among others to level the playing field when looking at deals.

      So, to not answer your questions, its horses for courses!

      Good luck!

      cube
      DFTBA

      Comment


      • #4
        Yield is also a factor in determining your servicability which affects how many properties you can buy and service from the lenders perspective.

        Also remember that depreciation is clawed back on sale so its more a loan from the government. This isn't such a major issue from a cash flow perspective as the sale price will hopefully be so much higher that the claw back doesn't cause you any problems.

        John

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        • #5
          I should also mention that the chattels part of the depreciation will help cover a very real cost when you come to replace them every 10 years or so (major maintenance items).

          John

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          • #6
            All good points, In your situation yield doesn't appear to be important. It is usually cashflow that is important. If you keep on buying negative cashflow properties you will run out of (3000s) to pay and will have to stop investing until your rental yields and other income allow you to progress. Using an IR23 to get your tax back with your other income helps this monthly cashflow situation but when you get down to paying no tax on your salary/wages then this opportunity has run out as well.
            Another issue is that capital gains that we all bank on with residential are based on emotional equity these days rather than income earning potential. This is likely to change and when the market is flat the only money you are likely to make will be net rental.
            Doug

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            • #7
              Yield is important for leveraging as it is a major determinant on what percentage deposit you have to put in to a property.

              The better the yield, the greater percentage you can lend therefore the better return from capital.

              So when you apply $20K capital gain on your property bought for $100K; your ROI on $5K deposit is obviously better than your ROI on $50K deposit.

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