Why do we calculate yield in property investment

[James.wu]

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

[Damap]

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.

[Rosco]

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

[PTILoveYou]

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

[orion]

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??

[PTILoveYou]

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.

[Damap]

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.

[PTILoveYou]

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

[Damap]

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 :-)

[PTILoveYou]

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.

[Damap]

Just winding you up son :-).

[donna]

I understand calculating the yield when you buy and it's based on purchase price but my accountant (like Rosco) also calculates yearly on property value - what is the reason for this ongoing calculation? Rents won't usually keep pace with property growth.

cheers,

Donna

[Wayne]

I understand calculating the yield when you buy and it's based on purchase price but my accountant (like Rosco) also calculates yearly on property value - what is the reason for this ongoing calculation? Rents won't usually keep pace with property growth.

To work out if the investment is still the best use of money.
Might be that you could sell and invest elsewhere for a better return.
Or maybe not.

[donna]

Yeah I thought so - thanks Wayne. Investors must be selling up AKL stock in favour of higher yielding properties elsewhere though it's not mentioned much on here.

cheers,

Donna

[orion]

I understand calculating the yield when you buy and it's based on purchase price but my accountant (like Rosco) also calculates yearly on property value - what is the reason for this ongoing calculation? Rents won't usually keep pace with property growth.

cheers,

Donna

I just do it at the time of purchase and then forget about it. Let the tenants pay off the mortgage and then you have the rent.
To me, there is no point in doing this yearly, or even ever again.
Some of the properties I have now are worth well over twice as much as when they were bought many years ago.
If I did a yield calculation now it would be around 6%.
To increase that, it means you sell and buy something higher yielding.
If you keep doing that, you are most likely liable for tax on all gains and you need to keep looking for higher yield opportunities which you may or may not find.
It's something Steve Mc Knight in Australia used to promote.
From an accountant's point of view (which he was) it may make logical sense, but to an investor it doesn't.
Buy something with the yield you want, finance it, then keep it and don't intend on ever selling it.