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  1. #1
    Join Date
    Dec 2015
    Posts
    129

    Default Why do we calculate yield in property investment

    Hi guys

    I am just learning on how to invest in property here. I can see people here talk about yield a lot. But I don't understand the purpose of calculating yield.

    Other please use ROI, and it make more sense to me.

    So so why do we use yield?

    just to be clear, when I said yield, I mean yearly rental income divide by purchase price. (is that what all you mean when you guys talk about yield?)

    thanks!

    James

  2. #2
    Join Date
    Jul 2012
    Location
    Tavua, Fiji
    Posts
    3,347

    Default

    That is gross yield which none of us use for investment. We are concerned with net yield to see if property is cash negative or not.
    This is income less all actual and notional expenses then divided by purchase price.

  3. #3
    Join Date
    May 2007
    Location
    Hamilton
    Posts
    3,613

    Default

    Hi James,

    We use Gross yield as a quick comparision and to give a quick indication of cashflow. It is quick and easy to calculate and gives you a starting point.

    I use purchase price when looking to buy a property, but I would use current value when evaluating and comparing existing rentals.

    Return on Investment calculations can be useless when reviewing rentals, as often there is little or no money invested, as 100% debt is very common.

    Ross
    More Profit from Property? TEACH ME MORE
    Ross Barnett - Coombe Smith Property Accountants
    Proud to give the best property advice for over 13 years.

  4. #4
    Join Date
    Sep 2013
    Location
    Auckland
    Posts
    3,885

    Default

    1) gross yield is a rough way to see if an investment makes sense or fit our buying criteria straight off the bat
    2) net yield or weekly +/- $cashflow is what matters in the end to see if the deal is really worth signing

  5. #5
    Join Date
    Dec 2003
    Location
    Hawkes Bay
    Posts
    1,738

    Default

    Quote Originally Posted by James.wu View Post
    Hi guys

    I am just learning on how to invest in property here. I can see people here talk about yield a lot. But I don't understand the purpose of calculating yield.

    Other please use ROI, and it make more sense to me.

    So so why do we use yield?

    just to be clear, when I said yield, I mean yearly rental income divide by purchase price. (is that what all you mean when you guys talk about yield?)

    thanks!

    James
    Most investors I know use gross yield for residential, net yield is more for commercial, or if you are using interest only.

    Having said that, you get to know what the approx. cost or rates, insurance etc are in the location you are buying in, so it's more of a cashflow calculation.
    In other words, you want to know if you have enough rent to cover the mortgage, rates, insurance etc.
    This can be on no deposit, a 20% deposit, I/O loan, P & I loan and then the term of the loan comes into it as well, i.e. how many years the loan is for.

    The yield for me (gross) gives a quick indication of what I need to know when making a decision to buy or not.

    What purpose would you have for using ROI??

  6. #6
    Join Date
    Sep 2013
    Location
    Auckland
    Posts
    3,885

    Default

    A well purchased property should have a rate of return or ROI of infinite, because the cost of investment should be zero.

    We call this No Money Down.

  7. #7
    Join Date
    Jul 2012
    Location
    Tavua, Fiji
    Posts
    3,347

    Default

    ROI is usually meaningless. The yanks use ROI and IRR for everything and as a result truckloads of them fail as they don't really understand their numbers. Teaching them about net and gross yield was quite a revelation for them. At the end of the day I guess we all work things out differently the main thing is to know what you're doing.

  8. #8
    Join Date
    Sep 2013
    Location
    Auckland
    Posts
    3,885

    Default

    Main thing for me (and a lot of my friends and classmates) is do more buying and less theory crafting.

  9. #9
    Join Date
    Jul 2012
    Location
    Tavua, Fiji
    Posts
    3,347

    Default

    That's easier for you rich Asians with loaded parents to bail you out Gaz. Us kiwis actually have some risk with our investing so have to be more careful :-)

  10. #10
    Join Date
    Sep 2013
    Location
    Auckland
    Posts
    3,885

    Default

    Quote Originally Posted by Damap View Post
    That's easier for you rich Asians with loaded parents to bail you out Gaz. Us kiwis actually have some risk with our investing so have to be more careful :-)
    Two three years ago that was a none issue in Auckland, zero deposit (after 3 months) AND positive cashflow.

    Also BNZ was lending at 90% for the first 4 rental properties, or 95% on first home.

    As for the asian thing, we have less incomes in general compare to kiwis, so what are you complaining about ;-)

    As for the deposit? I use 100% bank's money.
    Last edited by PTILoveYou; 22-12-2015 at 11:15 AM.


 

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