Yield calculation

[jahn]

Hi!
I am brand new at this and have been 'lurking' and reading just about everything on the forum for the last month. (since reading API magazine article on Jan Sommers). Before that, for the last year I have read all R Kyosaki and Dolf d Roos books and been to Dolfs seminar last year. I heard a saying that 'You cannot learn to swim by reading a book.' I decided to 'jump in' and we bought our second IP last month. Nearly drowned. Well, needed life jacket anyay. It is very close to +ve cash flow when taking ALL deductions into consideration.
Because there are so many knowledgeable and experienced people on this forum, I have been hesitant to join in, but I just got back from our accountant, where he explained his version of calculating yield for a property purchase.
I would appreciate any comments on this, as I thought it was simply,
Rent per annum/purchase price as a %
245000 Purchase price
230 x 52 Rent (11960)
11960 / 245000 % = 4.88
His version is,
Rent minus all expenses / purchase price as a %
245000 Purchase price
11960 rent
Strata fees
Property mngt fees
Rates
Insurance total of 2936
Yield = 3.68

Thank you in advance for any replies and for what I have already learned, and because I can't help myself, heres my "2 bob's worth" on some great threads that I missed out on.

My opinion is that life is the journey and the goal changes as you go.
My plan is to buy as many IPs as my full time employment and equity will allow. Hopefully +ve cash flow with good CG and hold
Buy where I know, which is a problem because no one seems to talk much about Newcastle even though residex puts it at around 26% CG last year.
And finally, I don't have any heroes, but I really admire Gandhi, Ammachi, my father, and my wife (partner-mentor-advisor, etc)
Thanks
jahn

 

[Ross Sneddon]

Hi Jahn

Well done, you jumped into the pond. We all need a life jacket from time to time so don't worry, you're swimming.

Wel I would say both you and the accountant may be correct.

You calculated a Gross Yield, 4.88%. I can agree.

You may for conservative purposes say 230 X 50 weeks is $11,500 and a return of 4.69%. This allows a two week vacancy factor.

Some Banks require an even more conservative calculation and will want say 90% of the rental income. i.e. 11960 X 90% / 245,000 = 4.39% and so on. Some Banks will allow even less.

Your accountant has taken an accurate calculation but if you are to subtract ALL expenses then he/she may have offset this figure with any taxation alleviation available, if available.

A valuer, (licensed and registered), when assessing a commercial investment, often takes the actual income and subtracts statutory charges only, Rates, Land Tax etc., ignores your controllable expenses and divides by the purchase price as a percentage.

We could go on forever.

Regards

Ross

 

[sbe]

Ross is correct.

Your figure is gross yield ( a good, quick way to compare)

The accountants is net yield (a more accurate way to compare).

If all things are equal between two properties, gross yield is fast and accurate enough to select which to investigate further.

Net yield is better when comparing different types - eg Normal house to an apartment. One has body corps' etc, the other doesn't, new vs old.

Reality - once you find one you like, use a simulator (like somersoft's) to crunch all the numbers. This allows for salary, deductions, depreciations, expenses etc and will tell you the real story....

Cheers,

Simon.

 

[jahn]

Thanks heaps Ross and Simon
makes sense
I suppose I got a bit concerned because the calculation was comparing real estate yield (my bias) to shares (his bias). I was caught off guard and couldn’t get across the idea that shares could not be depreciated for taxation purposes or 'improved' in value to accelerate equity - rent, etc.
I bought a program from Dolf before I learned about Jan and P.I.A
(it seems I rushed that one)
Also thanks to the forum team for their help to get me started
jahn

 

[Ross Sneddon]

Hi

As requested by Paul, we won't go back through the forum to find out why Paul had a problem a couple of years ago but for the sake of the newer forum members, let's take an example.

The cost of some operating costs vary little or not at all and don't bear any relationship to the cost of the investment or the rental income.

For example, Council rates may be $1500 per annum irrespective of whether the property costs $100,000, $300,000 or $22,000. The council rates therefore represent 1.5%, 0.5% or in the case of the $22,000 property, it is 6.8% of the purchase price. The same comparisons may be made with the rental income.

When comparing properties prior to purchase, run the figures through a spreadsheet program. A plug for the sponsors, The PIA program. PIA will automatically calculate expenditure as a percentage of income, which can assist in not finding too late that the investment is a poor investment.

Regards

Ross

 

[geoffw]

Another example.

About 18 months ago, a Queanbeyan apartment sold for $48,000. It was sold sight unseen to a Sydney investor. Rent was about $80 pw. Current market value then was perhaps $40K- the vendor was asking $48K but very optimistically expecting $45K- would have been happy with $40K.

The investor saw the price and the rental return.

But body corporate fees were $20pw- 25% of the rent. For a block which was completely concreted- no maintenance, and insurance was low. The body corporate was run by one lady who owned three units, with two mates- the other owners could not even be bothered to turn up to attend BC meetings, so the high fees were never vetoed.

The owner kept old car bodies in her parking spaces. This kept the desirability of the block right down. When the bodies were removed, more appeared in their place.

HOWEVER...

The units are probably worh $80K now. The cashflow is a helluva lot worse.