Why do so many people calculate gross returns?

[jerrybee]

I often see articles and posters on forums talk about yield, and when I calculate their numbers I realise they're all talking gross, not net.

My rule of thumb is always to lop off an immediate 30-35% of rent for fees, repairs etc. Why are they deluding themselves like that? Or perhaps there's a good reason for it? I understand that for the purposes of a like-for-like comparisons that's fine; if you're comparing gross with gross. But otherwise is there something else I'm not understanding / seeing?

 

[TPI]

I think half the time people don't really know what the net yield is with any degree of accuracy as it can change every year depending on council rate increases, maintenance/repairs, body corporate fees etc..

Lopping off 30-35% is a good start though!

 

[jerrybee]

I think half the time people don't really know what the net yield is with any degree of accuracy as it can change every year depending on council rate increases, maintenance/repairs, body corporate fees etc..

Lopping off 30-35% is a good start though!

Yeah, I just calculated all my properties, the good years, the bad years, then took an average...then added a few more % on top

Worst case - you're only a few % down.

Best case - you're way ahead.

It just makes it so much easier to plan my life this way. I just don't understand how people can claim a gross yield proudly. It just seems so delusional. But again there might be a legitimate reason for it which is what I'd like to better understand.

 

[turk]

Net depends on personal circumstances, some examples,

Tax rates if negatively geared

Tax rates for depreciation

Land tax

Using a PM or self managing

Maintenance by contractors or self

 

[jerrybee]

Net depends on personal circumstances, some examples,

Tax rates if negatively geared

Yes that's a good point. You've opened my eyes. I know it helps me in this area much more than the average person.

I guess as I said, from a pure like-for-like perspective there is some sense to it.

But when rationalizing an investment to oneself and for your own financial planning, it seems ludicrous to use gross.

But I do see the point now. Thanks.

 

[bez23]

I do a gross calculation just to have a quick estimate of the yield when I'm screening for properties because net yield has a lot of variables as stated above.

However, before I buy any property I'll do a spreadsheet to estimate the cashflow before and after tax, giving me a much clearer picture of the numbers specific to the property.

 

[Mick C]

I calculate the net yield...personally i like to see a dollar figure as well as % is pointless to me anyway ( break down of $ rent and $ expense)

ppl will market/ad gross yield, as everyone's personal financial situation is diff;
- self managed properties
- Tax bracket
- Land tax threshold
- insurance type/ and cover type ( ie upgrade of landlord insurance to malicious damage and lost of rent required or not..)
- interest rate- which bank, loan LVR, LMI, fixed, variable..

 

[EN710]

I look at both gross and net.

The gross yield of the property (not the yield of the area) is to weed out property that's doesn't have a chance to be cashflow neutral or positive even after further work (e.g. less than 5%) If the gross yields looks good (e.g. around 7% and above), I do further calculation for net yield.

 

[nhg]

I do gross for comparison reasons, as mentioned above, the net is very dependent on set-up and other personal circumstances.

That said, some advertisers are a little to lenient in their calculations, I've even seen one mob include both the FHBG and rental return if it was rented in the same calculation to show how great the return was.

 

[Corey Batt]

I work on gross, then net yields specific to the property. Council rates, taxation, depreciation and maintenance requirements can vary wildly, so the gross yield is really used for a basic line in the sand, before the rest of the analysis takes place.

 

[Alex P Keaton]

Would some kind person please share a rundown of gross yield (cash flow) examples. I've been trying to find some examples here but can't find anything.

 

[pinkboy]

Would some kind person please share a rundown of gross yield (cash flow) examples. I've been trying to find some examples here but can't find anything.

You're kidding aren't you?

pinkboy

 

[Alex P Keaton]

I found this

http://realestate.about.com/library/Investment/samplerentalyield.xls

 

[Blair007]

Would some kind person please share a rundown of gross yield (cash flow) examples. I've been trying to find some examples here but can't find anything.

Calculating Yield is always going to be different for different properties.
-You will have your Strata fees etc with units and apartments, which you won't have with houses.
-Older houses will higher maintenance costs.
-PM fees vary from company to company, state to state - i think here in WA its more expensive.
-Interests rates can vary from different lenders and depending on fixed/variable.
-Depreciation.

So many variables i usually add on 1.5% to my interest rate to calculate cash flows.

cheers

 

[Scott No Mates]

Net yields do not take into account the following:

a) Depreciation
b) Personal/company tax rates
c) Interest

On commercial you would include Land tax in the calculation of net yield but on a single holding basis only and where the land value exceeds the threshold.

Why? Every investor's situation differs - so why would you consider a-c?

You consider net yields on the above basis, as it makes the yield comparable to other investment returns eg: bank interest, bond yield, equities.

People quote gross yield because it is easy (but not relevant).

 

[Alex P Keaton]

This time around before I buy I will sit with my accountant or someone to run a few hypotheticals. Someone that doesnt cost an arm and a leg. I wont go blindly into my next ip and just "hope for the best" lol hehe I can laugh now.

 

[Alex P Keaton]

thanks for the help guys

 

[Peter_Tersteeg]

I look at the gross yield for several reasons.

The statistics gathers in various reports (Residex, RP Data, etc) report on gross yields. It's fairly easy to get a report that discloses the gross yield for a suburb. This is an obvious preliminary test to examine how the gross yield of a specific property and potential price measures up against what else is happening in the suburb. It's a simple way to get a rough idea of if the price you're paying is good or not.

It's also a quick way of sorting the wheat from the chaff. It can take a modest amount of time to determine if what the net yield is. The gross yield calculation can be performed in seconds.

If these stack up to my requirements, then I'll spend the time to do further due diligence including an estimate of the net yield. Gross yields is simply a way to perform a quick first pass.

 

[dex]

Would some kind person please share a rundown of gross yield (cash flow) examples. I've been trying to find some examples here but can't find anything.

It sounds like you're confused about how to calculate gross yield or you're not sure what it is? It's the annual rent divided by the property value expressed as a percentage.

Example:
Annual rent = $10,000
Property value = $200,000
10,000 / 200,000 = 5% gross yield.

So if the bank is offering a 1 year term deposit of 4%, the gross yield is 4%.

 

[FelixL]

gross yield is can be done in seconds in the head, very useful to quickly filter out noise

net yield will require spreadsheet, so ideally only doing few of them