How do I work out the true yield of an IP?

Hi Everyone, :D

I did a quick search, but could not find a clear answer.

This may be a very simple question for most of you, ive just been given two different answers by 3 different people.

When someone mentions “Rental Yield”, is the Value of the IP used to calculate this or is the amount owed to the bank on the IP used to do this?

Ie If an IP is worth $250,000 valued by the bank but only $150,000 is owed on it, do I use the $250,000 or the $150,000 in my “Rental Yield” formula?

Formula I am using. Rent p/w x 52 weeks / (Value? or Money owing to bank?) x 100 = Yield %

Cheers

Mick
 
Rental yield is based on the prospective price or value of your current IP not what you paid for it or what the outstanding loan balance is. The asset itself gives you a cashflow ie the rent, so it should be the value of acquiring the asset today that the cashflow should be compared against.

It is usually more relevant around the time when you are looking to purchase because you are looking at what cash flow implications the purchase may have on your budget and of course that is linked to your financing arrangements.

However, after you own an IP for sometime, this calculation becomes somewhat academic IMO. In this scenario, it is more the opportunity cost of being able to invest the equivalent amount of the value of the property elsewhere, taking into account transaction costs to do this.
 
Thanks again.

We purchased our PPOR for 170k and its worth 230-240k at the time of purchase.

If I found another place to live rent free, and converted our PPOR to an IP, would I use 170k or the "value' of the house being 230-240k to work out the yield?

Just throwing some numbers around.

Cheers

Mick
 
Thanks again.

We purchased our PPOR for 170k and its worth 230-240k at the time of purchase.

If I found another place to live rent free, and converted our PPOR to an IP, would I use 170k or the "value' of the house being 230-240k to work out the yield?

Just throwing some numbers around.

Cheers

Mick

Annual rent / $170k x 100
 
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