What is the minimum % yield you would consider when buying an investment property?

[mmerlin]

A property seen advertised online reads:

"Good Investment Property"
$300,000 - 370,000 By Neg.
3 Bedroom 1 bathroom L shaped dining and lounge rooms 2 car carport all on a good sized 620m2 block of land.
Great investment with a long term tenant Rent $215 per week.

http://www.realestate.com.au/cgi-bin/rsearch?a=o&id=101071466

So on the face of it, is this a good investment, average investment, or bad investment?

My calculator shows gross yield as 3.7% to 3.0% and that's not even taking into account the stamp duty and other associated costs.

I'd be interested to hear some opinions on what minimum % yield is considered acceptable when buying an investment property?

 

[ocean view]

mmerlin

The yield is not a issue to me when buying. The Short term Cap Gain is all I look at. Say 3 yrs.

So I guess I am far from an expert to answer this one.

Pass it along

cheers
ocean

 

[Cosmo]

Hi ocean view,

Surely holding costs are a concern to you?

 

[Bill.L]

Hi all,

mmerlin, an interesting question and the answer is "depends". Last year we were grabbing/looking for high yield properties. But if a really good location came up with more moderate yield then that would also be considered.

On the house that you highlighted in Chapel Hill, those numbers don't suit me at this stage of the cycle(plus it's not an area I have been following, so I don't know the value of the area).

This year we purchased a property with lower yield(around 5% gross, though it's not rented yet), as the area is good and the price was right provided we renovated(still doing).

Brings me back to "depends", on the area, your assumptions, and your input.

Sorry I can't help be more specific.

bye

 

[abcdiamond]

I agree with Bill, it "depends".

And this is where we trade of a low yield to a potential high CG.

Although I will admit that at first glance, I would see $215 versus $300k, and think; ouch, thats low. However, then I would look to see what the CG potential was, just in case it was a good one.


Re "Holding Costs" These would not be that relevant, to myself, as long as good CG was there. I will agree that they would be important to others without the immediate ability to fund the property without a good return.

regards

ABCD

 

[BUNDY]

mmerlin,

I think it depends on the individual investor and their cashflow situation. If I believe a property will achieve exceptional CG in the short to medium term, i will sacrifice rental yield to achieve strong CG.

Some investors may need to purchase higher yielding properties to balance their portfolio to continue investing. Others do not and are able to negatively gear and put some of their own cash into the deal.

I try to go no lower that 5% yield where possible.

BUNDY

 

[ocean view]

cosmo

As the Bear said. If you set your portfolio up to suit CG not yield it works.

One of mine cost me $800k in Dec 2002. Rental $300.00 per week.
Yes sounds dreadful & well basicly it is, But CG so far since DEC is 48%. True value now $1.15mil

That's where the short term pain is now just a basic holding cost
My growth rate should be around 15% next 12 mths then 10% the yr after. Compound that & it sure makes sense if you can handle the holding costs.

Since Dec I HAVE RE BORROWED another 2 yrs interest to hold the property. So now I have a property for 2 more yrs without any costs.

But to the newbies this can only work if you know your future Cap Gain. Guessing could become a headache.

cheers
ocean

 

[abcdiamond]

Ocean

It was interesting to see your figures, and compare them to mine.
I have been more conservative and have got a higher rent yield at 5.47%.

Your net income, Rent, less Interest (say 100% of cost at 6.5%) plus Capital gain would come out at $ 313,600 for the year.

Mine based on the same, and calculated up to $800k property value ( ie: 2 x $400k properties) would only return $160,000 for the same period.

It makes me think that maybe those expensive waterfront properties, may actually be worth the risk of the lower rental returns

Regards

ABCD

 

[Cosmo]

Hi ocean,

My brother like yourself goes for purely high CG’s and really doesn’t give a rats about return. He aims for beach locations (Sydney Northern Beaches) and to date his portfolio has skyrocketed in value (developer interest etc).
Do you hold short term? Are you looking at spots that would appeal to baby boomers? Do you find this end of the market to be more volatile in value than say compared to the median price houses in that particular area?

Sorry about the q’s just a bit curious…….

 

[Janfan]

Hi mmerlin

I have been trying to follow a 'rental reality' approach
which uses rental returns to determine value.ie divide the atainable rent by average three year rental yield. if the prop value is higher its overpriced.
A valuer does something similar when trying to determine value for finance.
IMHO this seems unworkable in the present market(max yields I can find 3-4%) which has left me floundering around a little.
I suppose if comparable sales are used to determine value
then crunching the numbers for your own situation and deciding on holding costs is your only other option

Janfan

 

[ocean view]

My example is one of many. If you compare the cg to yield it's like
a formula 1 car to a Mini. If you can't drive the F1(HOLDING COSTS) its not practical.

COSMO your brother is just 1 of thousands who buy near water. I would sugest that it is a little more in depth than that, to me anyway.

If CG is the main concern you need to take into account why the GAIN will be there. There are many reasons. The areas you buy obviously need to be in the best demanding places next yr NOT this YR.
For High CG's in interest rate effected markets Your research is even more critical.

But research is easy to gather. It all comes down to processing that information to get the outcome you want. No secrets just alot of commonsense.

To answer some of your q'ns cosmo, Short term or long term? Well lets just say it does not matter to me as long as I can receive a 8% P/A cg after holding costs P/A. with a return like that It will always been owned. But it is going to get harder the longer you hold it depending on the outlook & potential.

But another example . Home 1 in town A was $500k
CG for 1 yr was 50% (for this example lets say it's land. no rental yield)
Next following yr the CG rate was going to drop down to 10% yr 2.

If another home came up for sale at the time ....Home 2 in town B. $500K.
And Bank would not lend you money to buy home B But growth rate you can predict at 50% again. Would you sell to get the new one & another 40% gain?

The scenarios will always change for individuals. Knowledge , confidence & the ability to pay holding costs through many means.
So many ways to invest in property & do well. But like any investments there is always some sort of risk attached. Our job is to eliminate risk as much as we can.

cheers
ocean

 

[bundy1964]

For me in my part of the IP options

Yield for a new property 7% net.

Yield for an old property 8% net.

Current market 5 to 7% unless you find a poor Agent or an inflated rent.

I like to work in the 8 to 10% range, any higher than that the risk is too high for me.

bundy

 

[mmerlin]

Wow lots of opinions... this is really enlightening

JanFan: How do you find the average 3 years rental yield for a suburb? API mag has % growth, but not rental yield.

Ocean View: You mentioned you "re-borrowed another 2 yrs interest to hold the property and now I have a property for 2 more yrs without any costs."

Very interesting strategy, but I don't totally understand... can I ask what is covering the extra cost of repayments on the new borrowing?

Thanks all for the comments and strategies, my mind is opening up some more.

 

[quoll]

G'day mmerlin
For us yeild is important as we are still paying of our mortgage and can not afford to pay for IP's so we are buy dual oc cash flow + places.

Had a look at a really nice 630sqm timber frame cottage on a hill by a river and beach, corner block. Excellant CG potential, sub div, dual oc, but the number didn't stack up and we decided we could not afford the $$$. So we will go to the auction but probably won't be buying as the price will be to high for our situation.

If we didn't have the mortgage we would have put in an offer and tried to buy before auction but hey, thems the breaks.

Good luck with the decission. But buy something as the first step is the hardest.

quoll

 

[Splinter Wood]

HI Mmerls,


It seems most new investors go for higher returns as they need to service the loans etc. If you are on tight budget without much excess cash to backfill a lower rental IP (Such as the one advertized) then you need to go for the better yields.

My old trick is to check that the 'weekly' rent is close to the purchase price in '000's (i.e.$215 /weekly rental property is worth $215,000 to me !

If you have more experience and more cash/assets, then you can pick the eyes out of the market for higher CG which are usually more expensive and better areas(as prev.note, waterfront/ beachy areas)

The one advertized doesn't sound so good at first glance, unless it's in a very nice area whic strong CG potential, but as said you need to be able to carry it if you are borrowing a large % of the value.

If you can start off with a higher yield place, get your feet under the table and then get into a second place focusing on the CG might be a plan. (Look at some little county towns !)

God luck with it.

SW