The old 5% gross yield yardstick to determine right price

[Highlygeared]

I recently read a report published by Macquarie Bank that using the 5% gross yield to determine the appropriate fundamental price of a house in Metro Syd,Melbourne ,Bris. etc. was now inappropriate due to a historically low/er interest rate. In fact,the research ive seen (graphs) charting rental return has steadily fallen in capital cities over the last 30 yrs.

Is this the way of the future in your view where 5% on a house is 'good' or do you think we will soon gravitate towards say,8-9% on outer ring Metro property that we say prior to the last boom - c/o higher interest rates,forced sales, followed by median prices falling etc.?

Ive only invested in one cycle so far. Anyone more experienced whose seen it all?

 

[BV]

Hi HG
I don't know who came up with the 5% figure.
I guess if interest rates continue to increase,
rents will come up so the yield will also improve.
Cheers

 

[HeXa]

I was always led to believe that 5% was pretty damn ordinary.... often means a $400k place rents for $400/week

cash flow neutral/+ve places would be those 8-9%

 

[BayView]

The agents are great for trotting out that stat. They think 5% is good. No wonder so many of them are not investors.
People get conditioned to thinking 5% is ok, and it might be if you are doing a buy, reno and sell in a short period for cap gain, but not a buy and hold. The neg cashflow would kill most people.

I've been buying houses since '85, but only as an investor since 2001 and every house I've ever owned has gone up in value regardless of the cycle; but they were all low-mid range average joe houses in average suburbs except one. It was at the higher end, in a resort/weekend location, bought to run as a B&B, and we took a big gamble, highly leveraged ourselves, and worked our guts out just to hold it. We did a reno as it was needed to run the B&B, and it went up a fair whack (doubled in value in 2 years) but it was a total fluke.

As an investor I won't buy anything with a 5% yield, even if the cap growth prospects are good. It is not a guarantee, and I don't want to take that gamble and find out I bought a neg cashflowed I.P that didn't go up in value more than the neg cashflow in the mid-term (say; 3 years).

Thankfully, I can tell you that no matter what the market is doing, you can buy properties that defy the market and still go up in value, with a decent yield (at least the current interest rates), if you find the right areas.

 

[Mr. Fabulous]

I recently read a report published by Macquarie Bank that using the 5% gross yield to determine the appropriate fundamental price of a house in Metro Syd,Melbourne ,Bris. etc. was now inappropriate due to a historically low/er interest rate. In fact,the research ive seen (graphs) charting rental return has steadily fallen in capital cities over the last 30 yrs.

Is this the way of the future in your view where 5% on a house is 'good' or do you think we will soon gravitate towards say,8-9% on outer ring Metro property that we say prior to the last boom - c/o higher interest rates,forced sales, followed by median prices falling etc.?

Ive only invested in one cycle so far. Anyone more experienced whose seen it all?

Classic marketing tool to get people who don't know any better to invest in Macquarie products.

Mark

 

[rastus2]

Yield

It was not that long ago (12 years ?) when yields were far more impressive in many areas.

Looked at a block of 5 units 1 street from the beech in Townsville that would were +ve geared ... for some reason I doubted the Cap gains potential (Duh).

That was then, this is now.

I'd be impressed if you could find anything with +ve gearing and a decent chance of Capital gains in the next 5 years....

I'm willing to be that those days will return... but not until RE is on the nose... I sat through one grinding bear market (just before this bull).. I'm young enough to wait for another to come along before cherry picking another IP.

 

[Sunfish]

Looked at a block of 5 units 1 street from the beech in Townsville that would were +ve geared ... for some reason I doubted the Cap gains potential (Duh).

That was then, this is now.

Twelve years ago it would have needed to +ve because it would have been low cap gain for half the time. Out of curiosity would it have been close to the Seaview and how much?

 

[Highlygeared]

It was not that long ago (12 years ?) when yields were far more impressive in many areas.

Looked at a block of 5 units 1 street from the beech in Townsville that would were +ve geared ... for some reason I doubted the Cap gains potential (Duh).

That was then, this is now.

I'd be impressed if you could find anything with +ve gearing and a decent chance of Capital gains in the next 5 years....

I'm willing to be that those days will return... but not until RE is on the nose... I sat through one grinding bear market (just before this bull).. I'm young enough to wait for another to come along before cherry picking another IP.

I do agree with you, i think there will be more pain and the maths will rebalance to higher yields, in a higher int rate environment -unfortunately, the greedy side of me capitulated to acquiring anotehr IP last month. I think I paid just under fair market value BUT IN THIS MARKET ('bout 8% under). If the market falters furtehr, who can say? I am a man of contradictions, I think long term mistakes will be forgiven but not paying rockbottom/close hurts as an investor. I thrive on (real) immediate equity.