YAY, 5% gross yield after a quick 4 years

E

eggnog

just ranting. RE agent rang to inform me that the current tenants have proposed to pay extra on their rent as an incentive for me approving a 12 month contract. Quite happy about this.

However

This latest increase will bring my yield to ~5% gross of purchase price which equates to 3.x% nett yield and after 4 years of waiting. Yes the property has gone up in equity but the long agonising wait for yields to improve so that I may be able to service more debt is unbearable. But never again. This painfully long experience has shown me that cashflow is indeed king. It allows you to continue purchasing and not be stuck like I have.
 
I hear similar things regularly, and I still shake my head as to why people pony up for yields like this AT PURCHASE?

The saying that makes me mad is from the agent when they are asked about yield by a prospective buyer, and they have to give a response. Goes like this....

Buyer: "What is the yield?"

Agent: "5% - that's pretty good for this area" :rolleyes:

WTF?

5% is a crap return at any time, in any area. Don't ever do it, and certainly never do less - unless you earn $500k per year and you don't care.
 
I puchased a place 4 years ago at a gross yield of 5.3%. I would not have seen the value increase 40% and yield up to 7.8% if I followed your advice.
 
Waiting for yield to increase to help serviceability is a total pain and not really viable in an investing sense. 3% nett = terrible when bank rates are at ~7%.

And especially as banks only consider 75% of the yield.

Id suggest finding other ways to increase your income. Not waiting on rental increases.
 
eggnog said:
just ranting. RE agent rang to inform me that the current tenants have proposed to pay extra on their rent as an incentive for me approving a 12 month contract. Quite happy about this.
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Who's in control? You or the tenant. You can't complain about your poor yields when it appears that you are not proactive about managing your property.
So the tenants has to beg to pay more:confused:
5% gross on a purchase 4yrs old is very poor (unless your taking about some bluechip suburb where yields are around 3%).
 
Who's in control? You or the tenant. You can't complain about your poor yields when it appears that you are not proactive about managing your property.
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The rent in any area is largely controlled by the demand for that area; it's largely out of the investor's control unless they buy a dogbox, spend half a year and a poultice of shekels to add value and increase it that way.

You could do a Nathan and buy the dogbox in Upper Kumbukta, spend two shekels and increase the yield, but that's not yer "bluechip" by definition, so the bluechip/who cares what the yield is disciples aren't goin' there.

So the tenants has to beg to pay more:confused:
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I read about a tenant doing this; it was in Ripley's latest edition of "Believe it or Not". :D

5% gross on a purchase 4yrs old is very poor (unless your taking about some bluechip suburb where yields are around 3%)
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This is the one that always makes me laugh.
How do they come up with "blue chip"?
The cashflow is neg to buggery and the entry level is usually very high for the property type which excludes most would-be investors.

Even these properties experience periods of no or little growth, so if you buy in at the wrong end of the cycle, your blue chip is really chocolate brown unless you hold it for about 15-20 years, in which case your neg cashflow has wiped out a decent chunk of the cap growth.
 
eggnog said:
just ranting. RE agent rang to inform me that the current tenants have proposed to pay extra on their rent as an incentive for me approving a 12 month contract. Quite happy about this.
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Have you done your research? Does this rent rise bring it to market rates? It sounds to me like it could be considerably lower if the tenant is asking for a rental increase.
 
BayView said:
I read about a tenant doing this; it was in Ripley's latest edition of "Believe it or Not". :D
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Maybe you read it differently to me Bayview.
"RE agent rang to inform me that the current tenants have proposed to pay extra on their rent as an incentive for me approving a 12 month contract."

So RE rings landlord to say that tenants had come to them and said "please sir", we would love to pay more rent if you approve a 12mth contract. It's a lazy landlord that does not look at where the rental market is, and look at all options proactively.
In his case, it took the tenant to come and ask for a rental increase. And the latest increase will brings his yield to ~5% gross of purchase price:eek:

Nothing to do with the areas demand Bayview. If tenants are asking for rental increases then I can bet this guy had not even considered doing any improvements (even minor superficial ones) to try and boost the rental income from the property.
 
bluestorm said:
Maybe you read it differently to me Bayview.
"RE agent rang to inform me that the current tenants have proposed to pay extra on their rent as an incentive for me approving a 12 month contract."

So RE rings landlord to say that tenants had come to them and said "please sir", we would love to pay more rent if you approve a 12mth contract. It's a lazy landlord that does not look at where the rental market is, and look at all options proactively.
In his case, it took the tenant to come and ask for a rental increase. And the latest increase will brings his yield to ~5% gross of purchase price:eek:

Nothing to do with the areas demand Bayview. If tenants are asking for rental increases then I can bet this guy had not even considered doing any improvements (even minor superficial ones) to try and boost the rental income from the property.
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Yeah, nah; chose to ignore that bit and focus on the real core of the whinge - the yield NOW after 4 years.

God knows what it was at purchase. :eek:
 
5% yield is an absolute joke. In fact Australian property is an absolute joke. Where's the investment proposition when you pay 6.8% interest rates to get 5% yield? We are lucky we have so much valuable dirt to dig out of the ground.

And I share Bluestorm's sentiment that, while there are high cashflow properties out there, they are the exceptions. And when you're counting on exceptions to drive the market, you might as well punt the stockmarket.
 
eggnog said:
the long agonising wait for yields to improve so that I may be able to service more debt is unbearable. But never again. This painfully long experience has shown me that cashflow is indeed king. It allows you to continue purchasing and not be stuck like I have.
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Hi eggnog,


We recognised this trend years ago and fashioned our purchasing decisions around it. We believe it is based around the mechanisms behind the ability of the renters to pay a decent rent level.


When studying it, we found that CEO's and CFO's of companies....and pretty much all companies......were doing, and continue to do, a marvellous job at restricting their worker's wages to the smallest amount of increases possible. This usually equates to around CPI + 1 or 2% p.a.


So, if the workers wages are restricted to say a 4% p.a. increase, and they get no tax deduction for paying you rent....they are extremely reluctant to offer you, as a residential Landlord more rent....or more importantly be in a positin to afford more. You're capped, hindered, nuetered.


We didn't want our Tenants to be capped or hindered....so we targeted investment properties where the rent is paid out of company expenses. The companies fortunes are not restricted by CEO's and CFO's. They are actively encouraged to grow as fast as they can. This is the CEO's and CFO's main purpose at the company. Everyone is striving for this. Sometimes they have bad years, but mostly, if they are any good, they can have 20%, 50% or many 100's of % growth.


We feed off that growth for our income, and it becomes unrestricted. You don't have powerful enemies like CEO's and CFO's working against you - they work with you. The other thing of course, with non-residential properties, the Tenant's get a full tax deduction for any rent they pay you, so at a 30% tax rate, they are only chipping in 70% themselves, which allows you more freedom to increase it further.


I hope this gives you some of the fundamental background as to why you are having trouble increasing your yield, and why others in the property game are not equally restricted.
 
What is the potential of selling now that you've made some tasty CG and buying a couple of better yielding properties?

ATM I wouldn't buy anything with a gross yield under 8%
 
still around dazz. I like your comments. It highlights a different train of thought that is rare and shows a deeper understanding of investing.

The property has always had 6 month leases and reviewed to market. I think the tenant just wanted more security in their tenure so offered an increase in rent. Still haven't decided to accept or not. As a tenant myself I have attempted similar things before - ie: increased rent for 2 years fixed lease.

Don't think i'll sell. CG looks very rosy in the medium-long term. I'm just go change strategies and mindset. Focuse more on yield and YG (Yield Gains / Yield Growth. btw, if it's not taken i'd like to coin this term) instead of the more widely accepted investing strategy of negative gearing and CG.
 
Yea the market in brisbane at the moment is pretty bad, some mid level properties have dropped prices by 50-70k and in the top end in some cases 100k. I plan on holding of on buying for the time being and paying down debt.
 
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Empty Pockets said:
I puchased a place 4 years ago at a gross yield of 5.3%. I would not have seen the value increase 40% and yield up to 7.8% if I followed your advice.
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I would agree with this, the overall deal will tell you if its a good buy or not.

I bought my first IP 6 years ago for $720,000 in a good location, 3 bedroom house near Epping NSW- rental yield was only 4% net. ...6 years later- Rental yield is hovering around the 6% mark...however it's now worth $1.35M... Previous tenant offered $1.15M.

So rental yield is important but it's not everything, especially if your looking for capital growth ( where the real wealth lies).

Just my personal thought ;)

Regards
Michael
 
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