captial gains and yields

[Kimberly]

Hi everyone,

Ive found a house in a really good location which needs a lot of TLC but would return a great capital gain.
If I couldnt sell the property and I tenant it out, (the rent will cover the interest only part of the mortgage), but the increased value of the property will only give me a yield of 7%.

My questions are:
Are you negative gearing if your rent only pays the interest only part of your mortgage?
How important is a high yield when you are focused on capital gains? (It appears impossible to get both in my area)

Please forgive my lack of fundamentals - Im young and have the flu! (excuses, excuses......)

[Kiwi_Investor]

Hi Kimberly, I have done a basic yeild example below.

Rental Income P/A divide by current value (or purchase price) of ppty.

$200 pw X 52 $10,400 / say $200k as value = gives 5.2

A 5.2% yeild means that you would not cover the mort int in the above example, eg mort in around 7.5%

So money would be coming out of pocket to cover any shortfalls, eg
Rates, Insurance, Landlord Insurance, R & M, PM fees.

You can also do a more complex calculation taking into account other factors such as deprecation and adding a cap gains percentage to get nett yeild for a year.

Any time the costs (include paper cost eg deprecation) exceed income that is a basic negative gear.

At the end of the day it's about cashflow and how you manage it, also have some reserve funds. Also get accounting advice if your not sure.

Good Luck

[Kimberly]

Thankyou Kiwi_Investor,

As you can tell I am new at this.
If you were to put down a big deposit, would the yield be calculated on the mortgage balance or the purchase price?

[Julian]

Kimberly,

If you were to put down a big deposit, would the yield be calculated on the mortgage balance or the purchase price?

That kind of depends on who you are talking to. Say a place costs $200,000 and yeilds 5% nett (after costs but before finance or tax). If you borrow 100% @7.5% it will be negatively geared. Interest will cost you $15,000 but the property will only be bringing you in about $10,000 after costs.

If you throw $100,000 into the deal you will be positively geared. Your interest will cost you $7,500 which means $2,500 will go in you pocket as taxable income. (For the sake of simplicity I haven't factored in depreciation, which is, in effect, tax deferment or an allowance for actual replacement expenses you will incur in due course.)

With this second scenario you are NOT negatively geared, but you are effectively only getting a miserly 2.5% return on your money.

If you are buying with the intention of selling for capital gains you are trading, and must pay GST and income tax. I am sure if the IRD see a habit of buying poor performing assetts and selling them for a gain they will deem the person/entity to be trading. For those "investors" that find themselves in this predicament the repercussions could be painful.

Julian

[Kimberly]

Thankyou Julian for taking the time to respond. I love hearing everyones different views on what is deemed an investment etc.
My partner and I had a great mentor who had developed a heap of suburbs in Wellington. He told us the golden rule in property development was to save heaps of cash. Well, we have done that but it feels like it may be too late
Thanks again

[Ted]

Its never to late,

Have alook at this:

http://www.propertytalk.co.nz/postt3373.html

http://www.propertytalk.co.nz/postt3200.html

http://www.propertytalk.co.nz/posts3...otivation.html

Just remember the REAL DEALS are not there waiting for you. They are only there briefly when you just happen to be looking in the right place at the right time." RonHoyFong

I took that from Muppets signature. Make the deal work and if it doesnt match your property investing rules walk away and look for the next.

Reading your post reminds me of some books ive read. And ive read heaps in the last 6 months. Heres a quote from Orions book page 175 at the bottom.

Theres a differance between having an interest, and commitment.
Interested people have an excuse why they cant do something;
whereas committed people dont know about excuses.
Eg: an interested exerciser sees its raining outside and says -
'I think ill exercise tomorrow'.
whereas a committed exersier sees it raining outside and says-
"I better get my raincoat'.
Commitment is where you live as if your word is you!
page 197

"Blessed are the flexible for they cant be bent out of shape"

I dont know if thats helped you 1 little bit Kim but remember theres twists and turns and the odd speed bump on the road we travel each day.

Best regards

[Kimberly]

Thanks for the info Ted. I think Im just suffering a lack of motivation due to the nasty flu I have.
Actually my biggest problem is lack of patience rather than motivation. I believe there are great opportunities waiting for my cash, but I want to see them now...... We have two pieces of land that we are looking at building on around about August/September, and I was hoping to make a little extra money before then


Thanks again Ted

[Kiwi_Investor]

Hi Kimberly as you can see there are various ways and approaches for a yeild calc.
At the end of the day it's about cashflow management (I think I said that in my earlier post !) you may not have an idea of how you are travelling until you have had your ppty rented for a full year to see it's performance.

But you do need to do some yeild CG reseach before you buy, ie due dilligence and try and treat your investing as a business, after all your here to make money.

Hope you get well soon !!



KI

[kelster]

Good insightful replies Julian and Kiwi_Investor. Also having spare cash on hand helps psychologically as well as financially.