A yield question

[FreezingandHot]

If I collect a rent of $245.00 per wk on a $155,000
mortgage, what is the yield of this IP.

I know a lot of formulas but wanted to see how all of you would work this equation out.

Regards

FH

[Ivanhoe]

My early post contains error:
_________________________________________
yearly rent/price(assuming 100%finance)=net yield

8.2% in this case, gross is harder to estimate, most banks take 75% of rent (and if you add expenses like rates, insurance, maintenance etc you will get pretty close to this figure +/-5% in most cases), so we will have (estimated) 6.15% gros yield.

__________________________________________________ _

after a while some people noticed an error here, correct should be:

yearly rent/price(assuming 100%finance)=GROSS yield

8.2% in this case, NET is harder to estimate, most banks take 75% of rent (and if you add expenses like rates, insurance, maintenance etc you will get pretty close to this figure +/-5% in most cases), so we will have (estimated) 6.15% NET yield.
__________________________________________________ ________
Sorry for inconvenience...

[FreezingandHot]

Thanks Ivanhoe

Do you mean that at a net profit the yield would be 6.15% nor gross.

Regards

FH

[Chemill]

Generally I use return on capital:

Net Profit / Capital outlay - This is simple to work out and can be done on the back of an envelope, and can be easily compared to what the banks are offering (my personal benchmark).

My preferred method is the internal rate of return, and requires a bit of forecasting and more maths. (i.e Future Value = Present Value x (1+i)^n. i is the yield you are trying to figure out, and n is the number of years you are forcasting for.)

To calculate these yields I'd need further numbers i.e capital outlay, net profit expectations (need to know expenses), and expected rent growth.

Chemill

[FreezingandHot]

As I was only just below average at maths in my days at high school, what you have just written is way over the level that I could comprehend.

Thanks for the reply but I think I can only relate to
- + or =.

After all I am a graphic designer and not a bean counter.

Regards

FH

[Chemill]

hee hee.. Yeah, that's the problem with the internal rate of return.

I've written a spreadsheet to do the calcs but it's a bit user-unfriendly. One of these days I'll get it touched up and put on this website for everyone - but don't hold your breath......

Chemill

P.s The return on capital is simple right? Net profit / (deposit + legal fees + any other capital expenditure) x 100 = %

[fudosan]

Hi Ivanhoe,

yearly rent/price(assuming 100%finance)=net yield

My understanding is a bit different.

Gross yield = Yearly Rent / Price
Net yield = (Yearly Rent - Vacancy - Rates - Insurance - Repairs & Maintenance - Property Management (if any) ) / Price

What do you think?

[Ivanhoe]

Yeah, right, one of things that I have got mixed up from time to time, gross before expenses, net after, sorry about confusion....
Also there's "cash on cash" return which is a bit different - imagine you've put $10000 of YOUR money in the deal....
rent is $255, outgoings $200 per week, in you pocket - $50 per week, $2600 per year, 26% cash on cash return...

[CJ]

Gross yield = Yearly Rent / Price
Net yield = (Yearly Rent - Vacancy - Rates - Insurance - Repairs & Maintenance - Property Management (if any) ) / Price

Agree.

Net is (income - expenses)/ purchase price

[fudosan]

Net is (income - expenses)/ purchase price

I think the Americans use the term Net Operating Income for it. In other words, Net = NOI/purchase price. Another term for net yield is cap, or cap rate, or capitalization rate.

[krispedersen]

Agree with Fudosan,

However I believe that cash on cash return can be a better measure

Cheers

[FreezingandHot]

Yes, I think Dean has mentioned that to get a true indication of your profit before tax you need to take out expences after your income to get a true net yield.

Although I think from memory if you have a 10% gross yield you would still come out on top providing you are on the current interest rates.

Over to you's.

FH

[Mark_B]

My preferred method is the internal rate of return, and requires a bit of forecasting and more maths. (i.e Future Value = Present Value x (1+i)^n. i is the yield you are trying to figure out, and n is the number of years you are forcasting for.)

To calculate these yields I'd need further numbers i.e capital outlay, net profit expectations (need to know expenses), and expected rent growth.

I'm wary of internal rate of return.

So much of the return depends on the capital growth in a property and whether you call it an educated guess, smart buying, a gamble, whatever - when you buy an IP the CG is something you can only ever assume (that is, unless you have a pre-existing arrangement to sell / or have a registered valuation at a higher price on a specific date).

So, if I were to use an IRR then the results would be heavily dependant on my mood when I plugged in the figures. Optimistic = high CG and high IRR, pessimistic = lower CG and lower IRR, and so on.


Consider 3 cashflows, each with approximately the same IRR (between 19.91 and and 20.60%), but with vastly different cash flow patterns, and net cash flow amounts.

In each case, in Year 0 the net cash flow is -$20,000 (minus $20k).


* * *

..........OPTION 1........OPTION 2......OPTION 3

Year
0..........-20,000........-20,000........-20,000
1...........1000...........15,000............0
2...........2000...........11,000............0
3...........3000..............0.................0
4...........4000..............0.................0
5...........5000..............0.................0
6...........7000..............0.................0
7...........9000..............0.................0
8...........11,000...........0.............25,000
9...........13,000...........0.............35,000
10.........15,000............0.............45,000

Net CF....$50,000......$6,000 .......$85,000

IRR.........20.24%.......20.60%.......19.91%


* * *


If the IRR is any indication, all 3 options are about as good as each other.

And, depending on ones individual circumstances and goals, any one of the 3 could be "best".


Option 3, for example, has the highest net CF over the 10 year period, but (talking a hypothetical property here) gives you no income / capital gain to use until the 8th year.


Option 1 is nothing startling, pretty much slow and steady with a stronger trend towards the latter part of the decade. That series of cash flows / capital gains will help you sleep at night, but it will be a few years before you can use it as leverage.


Option 2 has (easily) the lowest net CF position - only +$6,000 over the decade. But this is achieved in years 1 and 2 ($26k back in 2 years) and it could well allow you to move into other investments.

This is an example of how an IRR can be misleading.

If any asset is bought with a view to using is as a stepping stone for more assets - and it doesnt allow you to do that either at all or for quite some time - then regardless of the IRR that asset underperforms for you.


Mark

http://www.somersoft.com/forums/showthread.php?t=21453

[xris]

Has anybody any thoughts or comments about using (Nett) Present Value - NPV - calculations as an indicator?

xris

xris

[Mark_B]

Your NPV calculations are a cousin of IRR.

The IRR tells you (effectively) at what rate of inflation (what discount rate) would the sum total of that series of cashflows have a NPV of zero.

Whereas NPV converts future dollars into todays equivalent based on some assumed discount rate that you determine (CPI estimate, typically).


This being the case NPV calculations are as fallible as IRR ones imho.

Mark