Calculating long term rental yield

Hi all,

I'm doing calculations for a property I'm looking to buy. The current rental yield is 4.5%. For the purposes of my calculations I'm assuming a 5% capital growth each year.

How would you calculate increases to rental yield? Do they generally grow in line with the value of the property (5%) or in line with inflation (2-3%)?

The property is 4,2,2 10kms from Beisbane CBD.
 
I think that it's prudent to assume rent going up at the same rate as inflation. If the investment doesn't stack up on this basis, I would walk away.

Also, bear in mind that inflation will probably be well under 3% for some time to come.
 
Neither, demand determines how much rent can be achieved. Inflation could reduce a person ability to pay increases.

So you assume rental reductions each year when you do your calculations? :confused:

Or do you just not do any forecasting, so that you can't be wrong?
 
From my past 15 years experience, generally rents keep pace with CG over the long term for middle market property located in metropolitan areas.
 
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There is no simple answer as rents are a function of supply and demand, interest rates and inflation. Generally they follow inflation. Large rental increases or decreases are more to do with under or over supply. Rents are more closely related to wages IMO. The current very low interest rate environment and a building boom is likely to lead to rent decreases in many locations.
In a booming market prices may grow 10-15% in a year with rents only edging higher decreasing the yield and then if there is no more growth for 5 years rents will most likely grind higher and the yield recovers back to somewhere close to what it was previously. Many factors can change this general explanation
 
Thanks!

Hi All,

Thanks for your responses! Thought provoking!

I understand this is a complex issue with many variables.

For the purposes of forecasting future cashflows, I'm going to assume rents will rise in line with inflation (which is likely to be below 3% for some time).

I have a strong cash buffer, so I'm not going to live or die by the calculations. I'm just trying to get a rough estimate of return.
 
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