Yields

[Rosco]

For investors who have purchased in the last year or two, was part of your criteria a certain yield? Or a property returning over a certain yield?

Just to clarify, yield is the expected annual rental/ purchase price. So average Hamilton rental might rent for $350 per week *50 weeks = $17,500, and if worth $350,000 thats a 5% yield.

If so what yield are you requiring? And what did you actually buy at?

Is the yield your major financial requirement, or do you also look at the overall financial picture? ie with rates, insurance, interest, repairs etc etc

I always look at the overall financial picture, as yield can be a little deceiving, but I'm curious what other buyers have actually been doing?

Example of yield vs overall financial picture problems

1) Low value property, where repairs can have major impact on cashflow
Purchase property for $100,000
Rent $200 per week, for say 50 weeks = $10,000 or 10% yield

But, looking at whole picture
Rent $10,000
Less Interest at say 6.5% $6,500
Less rates $1,500 - some smaller towns have high rates!
less Insurance $500
Less repairs $1500
Less Travel, bankfees accounting and others $1,000
Expenses total $11,000, so cash loss of $1,000
So yield looks good at 10%, but overall financial is still loss

2) Vacancy
I personally quite often work on 50 weeks occupancy. But, bad properties in bad areas don't always get this much occupancy, or you might structure to get the actual cash!
I had a one bedroom unit, fully furnished, where I received under 40 weeks rent actually in the hand.
Theoretical yield was $150*50 = $7,500 / $55000 = 13.6%
Real yield was 150 * say 40 = $6,000/$55,000 = 10.9%. Still not bad, but repairs and advertising for new tenants was also high

Also this discussion might help some new investors get their head around yield.

Ross

[damage]

Net yeild is the only number to look at.
I personally like to calculate the yeild based on the capital I have invested into the property, rather than the purchase price.
I do this as the purchase price can go up and down over the years and make the yeild calc's look odd

[Bluekiwi]

I have some nice properties in slightly dodgy areas of Clendon and Manurewa as well as better area's.
They rent just as well as the others although my property managers have to work a bit harder with them.
I would say 9% to 10% in these area's.

And 8.5% minimum in others.

Considering interest rates will come back close to 8.5% at some stage.
My main rule is that the rent covers the mortgage payments.
And I can handle the expense of when and if the rates insurance and maintenance comes out of my own pocket (actually its out of my rental R/C - so consuming equity in other words).

[GO DO IT]

Yield, I agree is important, but certainly not the be all and end all. We bought a few properties with high yields but found we had higher vacancies, more maintenance (generally) and worse tenants. The properties I am thinking of were in undesireable areas and therefore attracted undesireable tenants. We are now finding, from the property management angle, that better houses in better areas definately attract a better quality tenant. And yes, I agree with Bluekiwi we work harder in the less desirable areas to ensure we have minimal vacancy. The tenant turn over seems to be a lot higher in the less desirable areas. I would rather have a yield of 7% with a low maintenance property than a yield of 10% and high maintenance property.

The bottom line on the accountacy spreadsheets speaks for itself.

Cheers

[WGN ex-property manager]

8% gross yield, 7% net (happy to go light on the maintenance for a few years as a good reno is always part of the purchase project).

Outer CBD wellington suburbs

[Shane D]

Net yeild is the only number to look at.
I personally like to calculate the yeild based on the capital I have invested into the property, rather than the purchase price.
I do this as the purchase price can go up and down over the years and make the yeild calc's look odd

Damage,

Can you give us some specifc yield calculations from one or two of your properties?

In the 200+ posts I hear you talk about all this theory ...but lets hear some specifics from YOUR supposed properties.

[Shane D]

Rosco,

I aim for 8% min gross yield on Home and Incomes in Auckland ...well Papatoetoe actually.

Here are 2 calculations from 2 properties purchased within the last 15 months

Property 1
$384k purchase price
$6 reno
$390k total

$700 ($400+$300) x 50 = $35k annual Rent

9% gross yield (approx)


Property 2
$460k purchase price
$5 reno
$465k total

$780 ($450+$330) x 50 = $39k annual Rent
(new tenant moving in this week into the 2 bedroom. Raised rent from $300 to $330)

8.4% gross yield (approx)

Shane

[DazRaz]

Net yeild is the only number to look at.
I personally like to calculate the yeild based on the capital I have invested into the property, rather than the purchase price.
I do this as the purchase price can go up and down over the years and make the yeild calc's look odd

I never do this. But then all the places I've bought have been 100% finance. Doesn't make sense to calculate return on cash invented when you haven't put any in.

I like my free houses!

[damage]

Damage,

Can you give us some specifc yield calculations from one or two of your properties?

In the 200+ posts I hear you talk about all this theory ...but lets hear some specifics from YOUR supposed properties.

Sure thing.

I've got one property in the Mt which is returning $20k pa with out goings at present of about $11000
I've got a $100k tied up in it at the moment

So 9000/100000 = 9% Nett

Property in London = returning £14400 PA in rent, out goings £8700 . Capital tied up £60k
So (14400-8700=5700) 5700/60k = 9.5% Nett

Cheers

[PeterTach]

How can you make accurate comparisons if some people use Net returns and some us Gross and others work with the funding amount when most us the purchase price?

[damage]

what ever works for you Pete, that is what matters at the end of the day.

[Rosco]

8% gross yield, 7% net (happy to go light on the maintenance for a few years as a good reno is always part of the purchase project).

Outer CBD wellington suburbs

What do you mean by net rent, as your figures differ from my understanding of what net yield would.

Gross is rent divided by purchase price(I think we are all happy with this)

I would have thought net yield is, Rent less all expenses, divided by purchase price? If so, how does your net rent only drop by 1%?

An 8% yielding property could be $250,000, with rent around $400 per week, or $20,000 per year.

Rates say $1800, repairs at least $500, insurance $500, Travel $100, Accounting $500, bank fees $50, property management $1300, so those add up to $4,750. So rent less these would leave $15,250 or 6% (so 2% drop)

But obviously there is interest as well, and for a lot of people this would bring the total expenses to be more than the income, so a negative % which would be meanings (expect that it is negative).
Even if only around $200k mortgage, interest would be $11k or more, so total expenses now $15,750. Rent $20,000 less total expenses $15,750, leaves $4,250 or only 1.7% net yield.

As Damage said another way of looking at this is the Net profit (deficit) divided by your investment. I would call this "Return on Investment" or ROI. In this example there must be $50,000 invested, so $4,250 divided by $50,000 is 8.5%. Normally this would be done after tax but I didn't want to complicate things with depreciation and tax. Often with property if you have invested a small amount, you can get a ROI way over 10%.

Ross

[Shane D]

Sure thing.

I've got one property in the Mt which is returning $20k pa with out goings at present of about $11000
I've got a $100k tied up in it at the moment

So 9000/100000 = 9% Nett

Property in London = returning £14400 PA in rent, out goings £8700 . Capital tied up £60k
So (14400-8700=5700) 5700/60k = 9.5% Nett

Cheers

damage

Your numbers don't seem to compute from the few details you have provided below. No comment on the UK PI as I don't understnad that market but The Mount numbers seem suspect.

Damage's Mount property details

$20k annual rent ($20k divided by 50 weeks) = $400 a week. So lets assume this is a 3 or 4 bedroom house.

$11k annual expenses (lets assume average expenses for a 3/4 bedroom house)
- $1,500 maintance (this is on the low side)
- $1,500 rates
- $500 insurance
- $1,600 property mangament fee (@ 8% of annual rent)
$5,100 total

$11,000 (total outgoings) - $5,100 (fixed costs) = $5,900 for mortgage repayment

$5,900 mortgage repayment calculates to approx $100,000 borrowed from the bank.

Total cost of house
$100,000 mortgage + your $100,000 deposit (tied up) = $200,000 cost of house??

My question is where can you buy a 3/4 bedroom house in the Mount for $200,000????????

The only explanation I can think of is you bought this house 10 - 20 years ago. It must have been a "pig" of an investment back then and is only starting to pay its way now.

damage...care to clear up where I have gone wrong in the explanation above??

Shane

[damage]

Shane,.

Mortage Payment = 9720
Insurance = 600
Rates = 1400
TOTAL = 11720

I didn't include maintainance in my calcs so my yield will drop as a result. I also dont have a property manager.


Keep in mind I bought this place back in 2003.

Cheers

[J_J]

I think the topic of yields is very important in the current environment. As an investment, I dont think capital gain on property should be relied upon to make the investment "work".

I personally work on ROI to work out if a property/investment stacks up or not because if I was to invest this cash into any other asset this would be the way I would compare performance. And to be honest, I have a hard time finding any residential property that stacks up, although I haven't looked that hard to be honest.

What rate of return should residential property make? Well of the long term interest rate given at the banks is around 6%, then you would expect that a riskier asset would return more. The number I would be looking for is around 8-10%.

Damage. What were the numbers when you bought back in 2003? Did the investment still stack up from a yield perspective then?