Changing investment focus - Yield?

I have to admit that in deciding what property to buy, my focus has been on CG. Well chosen property increases in value over the long term and all, etc. My attitude to yield has been very much an after thought - identify CG oriented suburbs and then gravitate to those which offer the better yield.

With the credit crisis unfolding the way it is, I cant see much CG over the next several years, and perhaps some falls in individual suburbs or properties. At the same time I can see yields improving due to less supply coming online and the depressed houses.

I note that many people are sticking to their game plan re: CG and see this as a bying oportunity with regard to price. The talk seems to be of buying in a depressed market and waiting for the next boom.

While I'm young (early 30's), I think the next boom will be several years away - a considerable part of my investing lifetime. I'm very tempted to change my focus to yield. I'm not saying I'm planning on buying cash flow +ve properties, but my DD will be reversed. I will look for high yielding suburbs close to amenities and buy oportunistically to further increase yield. With likely rental increases they should be cheap to hold long term. It seems a much less riskier proposition than pinning my hopes on another boom in 3 years time as rates ease.

Half my brain says that history says I'll probably to well if I just stick to my guns. The other half says that I need to adapt to a changing environment context.

Yield allows you to service more debt, though. That's always a consideration I have.
Alex

The very first IP we bought was a great property in a great location, and at a great price.

Unfortunately, renting it for what we expected to get didn't happen. We expected $450, and got $350 p/w.

We have never been high income individuals, so all dollars are important, and $100 per week was a dent to the pocket; especially with a young child to raise.

Fortunately, the cap growth and depreciation softened the blow, but it was not fun to be so cash-strapped while our wealth grew. We eventually sold the property after 2 years and realised a modest cap gain, and had some lovely tax returns along the way.

It taught us a lesson; cashflow is first and foremost, and make sure the cap growth factors are there to carry the investment over the longer term.

Since then, we have only bought "cashflow positive after tax" properties - the Margaret Lomas philosophy.

The result has been fun investing. We have been able to maximise cashflow, reduce debt, lower the LVR, and still get good cap growth, and we now are in a position where we are not required to be working all that hard to support the whole show.

Now the goal posts have moved - the yields aren't as good, the interest rates are higher, the market is starting to show signs of a slowdown. People with lots of neg gearing right now may be in for some painful years ahead.

Our system until now has seen the nett worth increase to a level where we can now play the game differently; create the yield and the cap growth through subdivision, and/or redevelopment.

The sale proceeds will be used to pay out the debt of the project and keep one or more of the redeveloped properties after the project has been completed and sold.

The idea being that we will hold a pos geared property with high depreciation and rent yield - cashflow.

Then repeat.

Dis said:

I have to admit that in deciding what property to buy, my focus has been on CG. Well chosen property increases in value over the long term and all, etc. My attitude to yield has been very much an after thought - identify CG oriented suburbs and then gravitate to those which offer the better yield.

With the credit crisis unfolding the way it is, I cant see much CG over the next several years, and perhaps some falls in individual suburbs or properties. At the same time I can see yields improving due to less supply coming online and the depressed houses.

I note that many people are sticking to their game plan re: CG and see this as a bying oportunity with regard to price. The talk seems to be of buying in a depressed market and waiting for the next boom.

While I'm young (early 30's), I think the next boom will be several years away - a considerable part of my investing lifetime. I'm very tempted to change my focus to yield. I'm not saying I'm planning on buying cash flow +ve properties, but my DD will be reversed. I will look for high yielding suburbs close to amenities and buy oportunistically to further increase yield. With likely rental increases they should be cheap to hold long term. It seems a much less riskier proposition than pinning my hopes on another boom in 3 years time as rates ease.

Half my brain says that history says I'll probably to well if I just stick to my guns. The other half says that I need to adapt to a changing environment context.

Click to expand...

Dis....yields and CG are not always mutually exclusive for outer suburbs. This is a myth that has been perpetuated. I have managed to get over 6.5% yeilds as well as get decent capital growth (15-20%) on most of my properties in Adelaide and Melbourne....just ensure that they are suburbs with a lot of infrastrcture and roads coming through!

Lets use a simple example:

Property purchased in so called High Growth suburb in (2006):

Cost: 500k
Borrowings:450k
Interest rate (Interest Only): 7% fixed for 3 years
Interest paid (over 2 years): 63000
Other costs (over years): 10000
Current rental: 400pw or 20,800pa or 41,600 over 2 yrs
Current value: 650k
Holding costs: 31,400
Purchase Costs: 27,000
NET PROFIT AFTER 2 years: Current - ( cost + holding cost + purchase costs) - $91,600 NET PROFIT

3 proerties Property purchased in so called High Yield suburb in (2006)
Cost: 500k (3 properties)
Borrowings: 450k
Interest rate (Interest Only): 7% fixed for 3 years
Interest paid (over 2 years): 63000
Other costs (over 2 years): 18000
Current rental: 630 pw (210pw each) or 32,560pa or 65,120 over years
Current value: 600k
Holding costs: 15,880
Purchase costs: 19,000
NET PROFIT AFTER 2 years: Current - ( cost + holding cost + purchase costs) - $65,120,

Whislt the high CG surburb is marginally more profitable by about 26k...it requires $300pw to hold it...should CG stop you fall quickly behind. The high yiled property costs about 145pw to hold....with rent increases within years months it will be cashflow positive.

Dis said:

I have to admit that in deciding what property to buy, my focus has been on CG. Well chosen property increases in value over the long term and all, etc. My attitude to yield has been very much an after thought - identify CG oriented suburbs and then gravitate to those which offer the better yield.
.....
I note that many people are sticking to their game plan re: CG and see this as a bying oportunity with regard to price. The talk seems to be of buying in a depressed market and waiting for the next boom.
Half my brain says that history says I'll probably to well if I just stick to my guns. The other half says that I need to adapt to a changing environment context.

Click to expand...

What you're suggesting is taking advantage of the current time in the cycle to implement a low risk c/f neutral strategy that still has potential for CG when the cycle turns.... I like it

It's times like now that you start to think that successful investing is about achieving a satisfactory long term outcome, whilst surviving in the short term. Surviving the short term has been easy for the last few years, so many became complacent. Adapting to the current environment is the key IMO.

sash said:

....yields and CG are not always mutually exclusive. This is a myth that has been perpetuated.

Click to expand...

Agreed.

Unfortunately there is a huge dis-connect between the stuff we read in literature at the "market" level and what we can actually buy at the "title deed" level.

This creates massive problems for those who don't know fully what they are doing, and massive opportunities for those who do know what they are doing.

Of course, when newbies enter the market, if you ask them detailed questions about what they want to buy, after a small amount of digging, what they really are looking for is something that has both a high yield and the potential for high growth.

Most investors knock this idea straight on the head and sadly unveil their "reality" that you need to choose between the two....but you definitely can't have both.

I reckon that's wrong, and have consistently been able to buy title deeds over the past 4 years that have yielded well and grown their little sox off. These of course clear both hurdles quite well and would probably stand the best chance of dragging you through the rough patches such that you can enjoy and profit in the sun during the good times.

sash said:

Whislt the high CG surburb is marginally more profitable by about 26k...it requires $300pw to hold it...should CG stop you fall quickly behind. The high yiled property costs about 145pw to hold....with rent increases within years months it will be cashflow positive.

Click to expand...

The question is though ..... once CG stops what incentive do you have to continue to hold it?

yieldmatters said:

The question is though ..... once CG stops what incentive do you have to continue to hold it?

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I take a long term view....CG will continue as per cycles.

I am also about 24k in the positive (casflow).

Perhaps the question....is why would you sell...rents are going up...as a matter of fact my rents are increasing between 7k-10k per annum. Most of my loans are fixed...so I see no downside.

If property does not perform for a couple of years I can look a the sharemarket at some stage.

yieldmatters said:

The question is though ..... once CG stops what incentive do you have to continue to hold it?

Click to expand...

Problem is, you don't know when it's going to stop, and when it's going to start back up again.
Alex

sash said:

I take a long term view....CG will continue as per cycles.

I am also about 24k in the positive (casflow).

Click to expand...

Fair enough if that is your view on long term CG.

But I am confused about your positive cashflow statement. Didn't you just say you had holding costs on both properties? (i.e. interest and other costs are greater than rent received).

Negatively geared, positive cashflow?

I have a long term view on CG too, though I'm more bearish than Sash on the short term.

YM, it didn't really turn out that well for you the last time you tried to time CG, did it?
Alex

alexlee said:

YM, it didn't really turn out that well for you the last time you tried to time CG, did it?
Alex

Click to expand...

too early to say ...

So it's too early to say, even though your old place has gone up since you sold it, because you don't know whether it'll fall back to (or even past) your sale price?

By the same token, if I buy a property today, it falls in value over the next 4 years, I would also say it's too early to tell because it'll come back up.

Basically, it's never a good or bad decision to buy or sell until you hit the NEXT cycle?
Alex

Dis....yields and CG are not always mutually exclusive for outer suburbs. This is a myth that has been perpetuated. I have managed to get over 6.5% yeilds as well as get decent capital growth (15-20%) on most of my properties in Adelaide and Melbourne....just ensure that they are suburbs with a lot of infrastrcture and roads coming through!

Click to expand...

Yes, this is where I will be looking in the next few years. Prior to this I've taken the road of accepting 1-2% less yield for the potential of 1-2% better CG. Looking forward, I think I'd rather have my money now rather than wish for it in the future.

Dazzling said:

Of course, when newbies enter the market, if you ask them detailed questions about what they want to buy, after a small amount of digging, what they really are looking for is something that has both a high yield and the potential for high growth.

Most investors knock this idea straight on the head and sadly unveil their "reality" that you need to choose between the two....but you definitely can't have both.

I reckon that's wrong, and have consistently been able to buy title deeds over the past 4 years that have yielded well and grown their little sox off. These of course clear both hurdles quite well and would probably stand the best chance of dragging you through the rough patches such that you can enjoy and profit in the sun during the good times.

Click to expand...

Daz, I enjoy your posts immensely and the penny has well and truly dropped as to the advantages of commercial realestate. Unfortunately my balls remain stubornly retracted. Infact, I think they have gone up as far as my neck because I choke everytime I think about touching commercial - especially at this point in the business cycle. One of my investment goals for the next business cycle is to lean more about it. My hand will be forced on this issue because I'll have to sign a commecial lease / buy /develop my own business premesis anyway.

yieldmatters said:

Fair enough if that is your view on long term CG.

But I am confused about your positive cashflow statement. Didn't you just say you had holding costs on both properties? (i.e. interest and other costs are greater than rent received).

Click to expand...

That was just a example. So far I have managed not to pay any more than 190k for any of my properties. I bought 3 last year in Melbourne and Adelaide.

Looking for some in Brissie...if things cool.

alexlee said:

Negatively geared, positive cashflow?

I have a long term view on CG too, though I'm more bearish than Sash on the short term.

YM, it didn't really turn out that well for you the last time you tried to time CG, did it?
Alex

Click to expand...

A cautious bull Alex...I am a Taurus after all......lol!

Better be careful....I am looking for bears to gore at the moment..lol!

Did oyu answer my question as to where you have properties in a previous post?

sash said:

Did oyu answer my question as to where you have properties in a previous post?

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I did. Go read it.
Alex

alexlee said:

I did. Go read it.
Alex

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I forgot...want to send me the link....your highness?

Dis said:

Daz, I enjoy your posts immensely and the penny has well and truly dropped as to the advantages of commercial realestate. Unfortunately my balls remain stubornly retracted. Infact, I think they have gone up as far as my neck because I choke everytime I think about touching commercial - especially at this point in the business cycle. One of my investment goals for the next business cycle is to lean more about it. My hand will be forced on this issue because I'll have to sign a commecial lease / buy /develop my own business premesis anyway.

Click to expand...

Cheers Dis.....that was funny. I've heard them worn as earrings before, but your description had me rolling. Before you go into battle, think of yourself as Cecil the Ram mate.....hard callouses on the scrot from scrapping on the ground.....she'll be apples !!!!

In terms of your hand being forced, try not to get on the tenant side of things if you can avoid it....they don't usually have a pleasant time of it.....ask ol' Steve from Adelaide about it some day.

yieldmatters said:

The question is though ..... once CG stops what incentive do you have to continue to hold it?

Click to expand...

CG with property never stops YM - it slows down, as history shows. It can drop in certain circumstances, but not everywhere, and not for long.

If there is sufficient cashflow that the property/ies are paying for themselves, then there is no need to ever sell it/them.

And if there is equity increasing through the combination of cap growth, cashflow and debt reduction, then you can use that equity for other higher growth investments when property is flat - that's a double win.