Better to buy a high yielding property?

[menty]

If one was to predict a dip in house prices or a stagnation in prices, would it not bebetter off to purchase a property that is cheaper that rents for higher?

Eg: buying a cheaper apartment for say 250k which rents outfit 350 per week versus a house for 400k which may also rent out for 350 per week. (both positively geared as 200k sitting in offset account)

Although there is no land value in the cheaper apartment, IF house prices were to drop ( and I know not everyone may agree with this view), it seems as though the cheaper apartment is the better choice.

Furthermore, 200k in term deposit has much the same yield , or are my calculations wrong ?

 

[locko24]

Neither of the above examples would be postitively geared!!

 

[menty]

Assume 200k in the offset account

 

[Investor78]

I would go the cheaper apartment for the higher yield and better cashflow.

Having said that, I would not just buy any apartment that has that type of yield, I would still be looking for areas that will have potential to grow in the short to medium term.

If you buy an apartment in the right area, it can get better capital growth than houses. The land component of the property does not really dictate it's prospects for future capital growth.

Regarding the $200k, why not buy a few positve cashflow properties?

 

[Deltaberry]

Remember - high yield = low return.

 

[menty]

Sounds good might get a cheaper apartment now to just make use of the fhog and if prices drop next year get another ip with the money sitting in the offset account.Which locations would be cash-flow positive. This seems quite hard to find in Sydney.

Anyway these are my calculations:
200k in a 6.00pc td = 12000 a year in interest (needs to be taxed)

Vs

Borrowing 350k from the bank at 6.9pc. Buy property worth 250k. 200k in offset account, and hence, paying interest only on 100k st 6.9pc. repayments = 7896 per year assuming 30 year loan
Assume rent 350 per week. Gross rental income = 18200 for 52 weeks
Give 5000 per year for expenses = net 13200 income
Net cash-flow would hence be 13200 less 7896 bringing it to 5304 positive per year.

Compared to a td, which earns 12k in interest. Assuming there is no capital growth on the property, then does this mean that investing in this property has a less beneficial outcome over the 1 year scenario mentioned above. It seems as though my calculations are wrong as that is quite a large difference

 

[Aaron_C]

Sorry menty but property is, and always has been, a long-term investment. 1 year is not sufficient.

 

[wobbycarly]

Sounds good might get a cheaper apartment now to just make use of the fhog and if prices drop next year get another ip with the money sitting in the offset account.Which locations would be cash-flow positive. This seems quite hard to find in Sydney.

Anyway these are my calculations:
200k in a 6.00pc td = 12000 a year in interest (needs to be taxed)

Vs

Borrowing 350k from the bank at 6.9pc. Buy property worth 250k. 200k in offset account, and hence, paying interest only on 100k st 6.9pc. repayments = 7896 per year assuming 30 year loan
Assume rent 350 per week. Gross rental income = 18200 for 52 weeks
Give 5000 per year for expenses = net 13200 income
Net cash-flow would hence be 13200 less 7896 bringing it to 5304 positive per year.

Compared to a td, which earns 12k in interest. Assuming there is no capital growth on the property, then does this mean that investing in this property has a less beneficial outcome over the 1 year scenario mentioned above. It seems as though my calculations are wrong as that is quite a large difference

How would it look if you did the same calculation over 10 years, and include inflation. I suspect the outcome will be quite different.

Eg, deflate your debt, inflate your rent.

 

[Investor78]

Hi again,

Maybe you should clarify your goals for this investment if you haven't already?

You can invest for positive cashflow and/or capital growth, but it depends on what outcome you are trying to achieve.

Some people go for capital growth but know they must hold that property a minimum 5 years to achieve that growth (the gains could come quicker but there's no guarantee). They tend to use equity to leverage into more properties as well.

Others want to hold an asset that will provide an income that will eventually allow them to retire from their job and live off the cash flow. They also don't want to reduce their current cashflow, so they insist on having a neutral or positive cashflow which can then provide them more savings power to save up more deposits (and they should still see reasonable capital gain over the long term).

Then there are other strategies such as developing (or flipping) which can be more short term but is much riskier if you don't know what you're doing.

So what are you trying to achieve?

PS. Yes it can be difficult to find positive cashflow properties, but check out units in Mt Druitt as a quick check I can see 2 BR apartments selling around $210,000 and renting around $300/week (yield 7%+). I have no idea if this is a good place to invest, but shows you can get high yields around Sydney.

 

[Deltaberry]

That's right. If your objective is to make money, you might want to consider low yield. Remember, low yield, high growth. High yield, low growth. Ever studied bond theory?

 

[Belbo]

That's right. If your objective is to make money, you might want to consider low yield. Remember, low yield, high growth. High yield, low growth. Ever studied bond theory?

BUt houses and bonds are very different, which is why bond theory (no, I haven't actually studied it) sounds only loosely applicable.

Take for example Port Hedland over the last decade. High average CG (25%) and high yeilds (11%). Now look at Crows Nest over the last decade. Disappointing CG (4.8%) and paltry yeild (3.8%).

Bonds can be bought and sold by anyone, anywhere, at any time. They are virtual assets, homeless, and have no functional utility. Houses are very different. They are primarily functional entities, geographically fixed and highly illiquid assets.

The equation high CG = low yeild in property is in general the case, but not as firmly applicable as it is in bonds.

Yes, I know you'll now reply by raising the issue of 'risk', and please do.

But my point is that 'astute' property investors (to borrow awful real estate lingo) will search for uniquely mispriced properties - true, very often by applying more nuanced calculations as to risk - than your uninformed average Joe.

Over to you, Deltasquad . . .

 

[Investor78]

Well said Belbo, I agree.

One thing I'll add regarding capital growth vs cash flow are the tax issues. If you invest for cash flow, you will pay tax on the income at normal rates (unless your positive cash flow is generated through tax breaks).

If you rely on capital gains only and then sell for profit, you can claim the capital gains tax exemption (you only pay income tax on half the profit if held for more than 1 year).

These would also weigh into which strategy you want to follow.

 

[JT7]

Remember - high yield = low return.

I would disagree with this one Deltaberry.

I purchased a property in April 2010, at a 7.26% gross yield on purchase. 17 months later and there's been a shift in the market. Similar properties have increased $50-$60k and the yield has come up $50wk. I'm now sitting at a 8.4% gross yield. On the next lease I'll raise the rent again by $40-$50 to a 9.4% gross yield in a confirmed market in the space of 24 months!

Jack

 

[virgo]

Raising rents by $50!!

I would disagree with this one Deltaberry.

I purchased a property in April 2010, at a 7.26% gross yield on purchase. 17 months later and there's been a shift in the market. Similar properties have increased $50-$60k and the yield has come up $50wk. I'm now sitting at a 8.4% gross yield. On the next lease I'll raise the rent again by $40-$50 to a 9.4% gross yield in a confirmed market in the space of 24 months!

Jack

Hi Jack

Pray tell where in Sydney you can raise your rents by $40-$50 a week?

Is this in Hornsby shire? Reason i am asking is i am building a granny flat in this shire and would like to hear about your experience!!!

 

[menty]

My plan is actually to maximize my fhog and stamp duty with the least risk. I would ideally save about 14-20k off this initial purchase before covert ng it to a ppor. I would like capital gain. However, if the capital gain does not increase much over time ( price stagnation) then I fear that this will be a poor investment decision.

I can find apartments going for 250 to 300 k with 350 a week rent. If and when house prices decrease further I plan on buying another property.

I am unsure if this is a good plan

 

[JT7]

Hi Jack

Pray tell where in Sydney you can raise your rents by $40-$50 a week?

Is this in Hornsby shire? Reason i am asking is i am building a granny flat in this shire and would like to hear about your experience!!!

No not Sydney...CQ. My comment was more directed at the actual statement. That aside, I'm sure you will do very well with your GF strategy!

 

[Sunfish]

It's interesting. Years ago on this site, if anyone dared speak of "rental return" they were dismissed as "short sighted". That was the time Sydney property was hitting it's peak.

Fortunately I didn't believe them. There must be 10,000 ONCE members who are no longer with us. Are they victims of "belief"?

 

[Rooster]

Borrowing 350k from the bank at 6.9pc. Buy property worth 250k. 200k in offset account, and hence, paying interest only on 100k st 6.9pc. repayments = 7896 per year assuming 30 year loan
Assume rent 350 per week. Gross rental income = 18200 for 52 weeks
Give 5000 per year for expenses = net 13200 income
Net cash-flow would hence be 13200 less 7896 bringing it to 5304 positive per year.

Your sums are wrong.

Either you're borrowing $350k or $250k. Which is it?

If you take off your $200k offset amount, you are left with either $150k or $50k to pay interest on.


Rooster

 

[Deltaberry]

BUt houses and bonds are very different, which is why bond theory (no, I haven't actually studied it) sounds only loosely applicable.

Take for example Port Hedland over the last decade. High average CG (25%) and high yeilds (11%). Now look at Crows Nest over the last decade. Disappointing CG (4.8%) and paltry yeild (3.8%).

Bonds can be bought and sold by anyone, anywhere, at any time. They are virtual assets, homeless, and have no functional utility. Houses are very different. They are primarily functional entities, geographically fixed and highly illiquid assets.

The equation high CG = low yeild in property is in general the case, but not as firmly applicable as it is in bonds.

Yes, I know you'll now reply by raising the issue of 'risk', and please do.

But my point is that 'astute' property investors (to borrow awful real estate lingo) will search for uniquely mispriced properties - true, very often by applying more nuanced calculations as to risk - than your uninformed average Joe.

Over to you, Deltasquad . . .

No I'm too tired to put up an argument. But just putting it out there for the original poster to consider. He'll understand when he reads some bond theory.

 

[Thesnowyforest]

Why not buy some great dividend yielding shares on the ultimate capitulation days ?

bugger all entry costs and better tax effective yields than rental income.