What is an acceptable gross/net yield now that rates are so low?

[dex]

There used to be a rough rule of thumb which said the gross yield was 5% for houses and 7% for units. That was when rates were higher than they are now. Of course this was flexible depending on the suburb and location.

So now that standard variable rates are under 5%, do you think a 5.5% gross yield on a unit in a good location is acceptable or too low? I'm looking at one with a 5.5% gross yield but only 3.3% net yield. The location is good so I'm banking on future cap growth.

My definitions:
Purchase price = Contract price. Doesn't include stamp duty or conveyancing fees.
Gross yield = Annual rent divided by the purchase price, expressed as a %.
Net yield = Annual rent minus body corp, agent management fees, council and water rates; divided by the purchase price, expressed as a %.

 

[Bhp19]

Do you factor insurance into Net yield?

 

[spludgey]

7% for houses for me. I don't buy units, so don't have a percentage for those.

 

[Bhp19]

Spludgey, do you buy regional or metro and if metro do you have difficulty finding properties with a 7% yield?

 

[Intrinsic_Value]

There used to be a rough rule of thumb which said the gross yield was 5% for houses and 7% for units. That was when rates were higher than they are now. Of course this was flexible depending on the suburb and location.

So now that standard variable rates are under 5%, do you think a 5.5% gross yield on a unit in a good location is acceptable or too low? I'm looking at one with a 5.5% gross yield but only 3.3% net yield. The location is good so I'm banking on future cap growth.

My definitions:
Purchase price = Contract price. Doesn't include stamp duty or conveyancing fees.
Gross yield = Annual rent divided by the purchase price, expressed as a %.
Net yield = Annual rent minus body corp, agent management fees, council and water rates; divided by the purchase price, expressed as a %.

I still get 7% for units, just have to be a bit more creative.
On a new settlement I will hit just over 7% gross for a Melbourne CBD property with car park.

In regards to the rest of your post.

No I am an Austrian type of investor.

Austrian type investors are absolute types of investors, very similar to my IV when it comes to shares. Neither school of thought invests because of relative opportunities. They investment because of absolute investment opportunities.

If that relativity changes, then people could be in big dodo. BUt with absolute investing, the investment must stand on its on merit, regardless of 'relative' investment opportunities.

That relativity doesn't effect my investment decision one iota (except as a financing means so long as I can tie that finance up for a decent period of time)

 

[spludgey]

Spludgey, do you buy regional or metro and if metro do you have difficulty finding properties with a 7% yield?

Central Coast NSW, Rockhampton QLD, Logan QLD and Elizabeth (in the north of Adelaide) SA.
So I'd say a bit of a mix of suburban and regional.

 

[nhg]

I aim for minimum 8%+ in metro areas for houses.

Don't touch apartments.

I aim to be minimum 1-2% above the historical average loan rate as opposed to the 'lowest ever recorded rate in history' as it is a long term game. I would comfortably go much less than this for a quality development site, regardless each site must have opportunities for value adding in the short to medium term.

Really depends on your own comfort level, holding ability and purpose.

Rule of thumb I use is:
- Interest Rate + 1.5% for houses;
- Interest Rate + 2% for apartments based using ALL expenses.
eg. 4.5% borrowing rate, so I would want the house to be returning at least 6%.
If you are only using purchase price to determine your ROI, I'd be closer to 10% and even higher based on my LVR.

 

[Michael_X]

7% for houses for me. I don't buy units, so don't have a percentage for those.

Same as spludgey - 7% for me.

Don't mind to shave off a little for potential to add value properties.

 

[coastal]

Every ones strategy is diff...I aim for 10- 15%. However I invest mostly in regional areas

 

[JameZ]

Same as spludgey - 7% for me.

Don't mind to shave off a little for potential to add value properties.

Is this 7% gross yield?

 

[Corey Batt]

7-11% gross dependent on the security, area and other factors. I'm more interested in total potential return, so I don't use a basic metric.

This figure hasn't changed with the rate movements, as that's a tad short sighted imho when we're talking about investments with investment horizons measured in the decades.

 

[Michael_X]

Is this 7% gross yield?

Yes, 7% gross.

Base this on holding costs which varies from state to state. So tweak accordingly with actuals. The goal is positive or neutral cashflow from day 1.

Cheers,
Michael

 

[Bhp19]

Would anyone who has posted on this thread be willing to post an example of a metro property (preferably a house) that returns a 7%+ gross yield just to show that they can be found?

 

[dex]

Do you factor insurance into Net yield?

No.

Would anyone who has posted on this thread be willing to post an example of a metro property (preferably a house) that returns a 7%+ gross yield just to show that they can be found?

I think the guys talking about getting 7%+ gross yields are buying in regional areas or places where cap growth is limited but I could be wrong. I'm not a property snob but I prefer to buy in blue chip areas, renovate and hold for the long term.

 

[Bhp19]

Hey Dex,

a few have posted that they have achieved those yields in non regional areas in several threads and I thought it would be a good example for myself and others if they could post a link to one they can find on RE.com, just to show it can be done, even better if it's in an area one would expect to achieve reasonable capital growth also.

Why don't you factor in insurance when working out net yield? I was of the understanding that you include all outgoings when working out net?

 

[Deltaberry]

Depends where, what segment of the market and what the purpose of the land is. Obviously having higher yields protects you.

But some of the best properties I've seen sell for 1-2% yields

 

[dex]

Hey Dex,

a few have posted that they have achieved those yields in non regional areas in several threads and I thought it would be a good example for myself and others if they could post a link to one they can find on RE.com, just to show it can be done, even better if it's in an area one would expect to achieve reasonable capital growth also.

Why don't you factor in insurance when working out net yield? I was of the understanding that you include all outgoings when working out net?

I think their definition of non regional is different to mine. Sure you can get 7%+ yields but they'd be in areas I probably wouldn't consider. Agree with Deltaberry the best properties have super low yields but this is the trade off for A grade location with virtually nil vacancies.

Maybe I should include insurance but it's not much and doesn't really affect my yield calculations. I pay around $200-230 for landlord ins on 1-2 bedroom units.

 

[mflying]

Keep it at circa 7%

That's what most banks buffer rate is at the moment.

 

[skater]

Yes, 7% gross.

Base this on holding costs which varies from state to state. So tweak accordingly with actuals. The goal is positive or neutral cashflow from day 1.

Cheers,
Michael

Same! Although I do try for higher than 7%.

No.



I think the guys talking about getting 7%+ gross yields are buying in regional areas or places where cap growth is limited but I could be wrong.

You are very wrong!

There are plenty of metro properties where you can get 7% or better yields. You just have to keep your eyes open to find them. No, they won't always be available in the area you are targeting. It depends on the market conditions at the time. If you are smack bang in the middle of a boom, then the chances of finding a high yielding property is much, much lower.

High yielding properties don't have to be lower CG properties. The two don't always go hand in hand.

Yes, I've got regional properties, but I've also got quite a few metro ones as well which were all bought with a good strong yield.

 

[Biz]

Yield doesn't tell the full story anyway. 7% on a 200k property isn't the same as 7% on a 500k property after you take out expenses.