How Good are your Returns

[rollyt]

I already own an IP in my country town of Kiama, NSW
I have noticed property in my area has risen in the last 12 months by $100000.

I am wanting to purchase another IP in my backyard but the prices of houses in my area start at $350000 to $420000 for anything decent.

The rent on this IP ranges from $260 to $290 per week.
by the time you calculate your yearly income MINUS all your Outgoings( rates, maintenance, insurances, landtaxes, Management &l etting Fees and loan repayments) the return on your monies is about 1%.

How do you justify a 1% return ?
Would you be better off buying blue chip shares with a good Dividend?
Would you be better of investing in a cash mangement trust that is returning around 4%?
Your Comments would be appreciated

Regards RollyHow good are your returns

 

[Easymonet]

I would not buy with those figures, but I suppose some might say that if you get really good capital gains then that is justification.

 

[NigelW]

Rollyt

Is it really 1% on your money? what about gearing? most of the money in the property is probably the banks...so you don't have that much capital tied up.

It may be 1% on $300K, but if only $30K of it is yours that's actually a 10% return on your invested capital (okay I know I'm ignoring all sorts of things here like acquisition costs etc etc but you get the concept!)

Give me a lever long enough (or a bank with flexible enough lending criteria) and I will move the world! (Aristotle or some other old greek guy)...

cheers
N

 

[F.P]

Rollyt

You may want to consider looking outside of your area. I have recently started actively looking at areas outside of my home town again, and there are properties that are returning 5 to 6%. With a bit of a fix etc, you can lift this a bit higher.

Anyway, you shouldn't accept 1%.

just my two cents worth...

 

[Kevmeister]

If you are talking purely about rental income and interest expenses and other property expenses (ie. ignoring taxman) then it does not surprise me the nett Yield is 1%.

As you pointed out, property prices in your area have risen by $100K. Yield's do not take into Capital Growth.

There appears to be a strong relationship between Yield and Cap Growth. When one is high, the other is low, or vice versa. Jan Somer's points this out but, more important, gives a realistic explanation of why it occurs.

So, you might be getting only a 1% Yield on your $300K investment, but these types of property probably make money for you on the basis of their Capital Growth, not their Yield.

If I understand what you have written, if I could put in a $30K deposit (10%), get 1% nett yield on the $300K investment property ($3K per annum), my cash-on-cash return is 10%.

That itself is pretty good. And, in 7-10 years the property will probably have doubled in value, so there's another $300K of capital growth.

You have a cashflow positive property with a 1% yield, paying itself off, you get capital growth (hopefully) in the future, even if you don't you've made 10% pa on your original investment (cash on cash return).

It really depends what you are investing for. Remember that negative gearing sounds like a stupid idea because a -ve % return is involved, until you realise that the idea is based on the assumption (or hope, some might say) that property itself will increase in value, which is not reflected in the yield.