Yield question

[L Bernham]

Sorry, See change, I got it from my memory. Tried to find if I still had the research I read it from but I cant find it.

Some of Shane Olivers reports from AMP Henderson (free from their website) have some pretty good statistics showing similar cycles indicating that we are currently above all previous cyclical peaks after which there is usually a pretty big decline.

If I can find my source I will post.

Re yield: yield should always be calculated using current market value. Using historical cost is pointless for future decision making as once youve paid the money its a sunk cost and therefore irrelevant.

 

[jahn]

L Bernham

"Re yield: yield should always be calculated using current market value. Using historical cost is pointless for future decision making as once youve paid the money its a sunk cost and therefore irrelevant."
What is irrelevent to me, is different to someone elses priorities. Not being nasty here, but if I'm buying for long tem, then yield at time of purchase, is very relevant. Future decision making yield figures don't seem to enter into my needs.
jahn

 

[ella]

Yeah, I'm a novice here but I would have thought that only related to properties bought for capital gain. But if you were intending to keep the property/ies long-term, for rental income purposes, then surely it ought to be the purchase price that's relevant ... ?

- ella

 

[Kevmeister]

Hmmm. I think what you choose to calculate as a Yield depends on what you want to use the value for.

Consider you bought a growth property 20 years ago for $50K. Today it is renting for $200 per week. Do you have a 20.8% Yield?

I would contend that you do not have a 20.8% Yield, because your Yield has failed to take into account the current value of your investment. In fact, if the property is now worth $600K, you only receive 1.7% of the value of the property each year in rent (deliberately avoiding use of the term "Yield").

Your 20-year-old property is now worth $600K, so why be delusional with thinking you are getting a 20.8% yield? The $600K of funds

Yields are useful for comparing the returns from like investments. Two properties are not necessarily "like" investments unless they are delivering the same growth, in my opinion.

The crappy "yield" of 1.7% in the above example doesn't do justice to the 13.5% (approx) growth that the property has averaged over 20 years. The gross return today is therefore about 15%.

Yield ignores the growth of a property so it does nothing to tell me how good the investment is as a whole.

The only useful thing a Yield gives me is a quick idea of whether the property will likely be positively or negatively geared, depending on the current interest rate.

 

[jahn]

Hi Kevin
I think I like your explanation!?
Comparing apples to apples is a good thing (particularly if you are hungry), but as you said, comparing yield from new purchase, to yield from a purchase 20 years ago, based on todays ? value, to me would not be as relevant as "how much do I make out of this"
I do know that even if I had a 20.8% yield, (I wish), I think the bank tellers would have problems fitting it in to their system.
jahn

 

[L Bernham]

Jahn Wrote
What is irrelevent to me, is different to someone elses priorities. Not being nasty here, but if I'm buying for long tem, then yield at time of purchase, is very relevant. Future decision making yield figures don't seem to enter into my needs.

Yes - yield at time of purchase is important. Once the market value changes, what you paid for it becomes irrelevant.

What do you use as the cost base if you inherit a property?Because its effectively free any yield would be huge. Based on this you would never sell!!?
Or what if you get a bargain because the little old lady who sold it to you didnt realise the market value and immediately after you buy you're offered double what you paid for it.

Its all well and good to use historical cost as a measure for your own interest. but for future decision making it is pointless.

 

[jahn]

Hi L Bernham
I suppose you could say that if you were going to build something, and you used nails, you would need a hammer (or nailgun ) . But if you were going to use screws, the hammer is not necessarily what you would need. (Unless in a very big hurry)
Then again to glue it together, the hammer could get very messy.
I suppose what I am trying to say is, if I inhereted a property, I would not be able to use yield calculation based on puchase price because it would be irrelevant.
I don't understand the question;
"Because its effectively free any yield would be huge. Based on this you would never sell!!? "
I am quite capable of appreciating value under many circumstances, and don't need to figure yield, to assertain that value. What does it matter if the yield is 5% - 50% or 500% if I am making net profit at no outlay. I bank money, not percentages.
(Well some of the time anyway)
BTW A future decision making process to decide whether to sell a property that has doubled in price for whatever reason does not have a yield calculaton in my figuring.

 

[L Bernham]

Well what decisions do you make using yield.
If none, and the only purpose to calculate yield is for your own interest, then carry on. It wont matter how you calculate yield in that case.

Yield based on historic cost becomes more irrelevant as time progresses.

 

[jahn]

Hi L Bernham
YES. We agree on something.!
"Yield based on historic cost becomes more irrelevant as time progresses."
I wouldn't say I just calculate yield for my own interest, ( but I do like going over numbers a lot, like possible growth equity, etc )
but I suppose that when I do calculate yield, it possibly is not of any interest to anyone else ?
As I posted before, but you must have mist it, - "Not being nasty here, but if I'm buying for long term, then yield at time of purchase, is very relevant. "
jahn

 

[wjcrowl]

Jahn and Bernham

Good discussion. In this discussion on yield is what we are really talking about, how to estimate ROI of the property. In which case good estimations of capital growth are required. I know in my case I generally use conservative CG figures as I believe in erring on the cautious side. the downside of this is I have been put off buying property that would have shown a good return.

So what is the most effective way to assess the property. I like strong yeilds for cashflow and personally not that interested in -ve gearing properties.

What are your thoughts.

Wayne

 

[L Bernham]

wjcrawl
thanks.
So you err on the side of caution when calculating ROI.
Does this mean you estimate negative capital growth for your decisions?

Capital growth in the next few years is going to be somewhere between -30% and +30% so a cautious estimate would be towards the bottom end of that range.
Jsut interested to know what your estimates are.
cheers
L Bernham

 

[jahn]

Hi Wayne
Thanks - all in the name of education and trying to get it right.
For your question - "So what is the most effective way to assess the property. I like strong yeilds for cashflow and personally not that interested in -ve gearing properties."
There are many people on this forum who know more than I on this (and many other) topic, but for what it's worth, here goes.

I have seen some great discussions on this in the past, so a "search" for specifics would get good results.

Some of the more experienced will be able to quote the normal, acceptable, and current yield figres for different areas of the market, and it really depends on what you are comfortable with, where, and for how long. Long term IP business basically is getting it as right as you can "When you buy". And a lot of that depends on what type of IP.
Before I waffle on tooo much, you would get better answers with a bit more info supplied, e.g. Your tax strategy - purchase amount (ball park estimate) area of interest etc.
Just a thought, to show the amount of interest in just your comment on "cashflow" check this out;
http://www.somersoft.com/forums/showthread.php?s=&threadid=10303
Forget about the specific areas if need be.
As Asey has said a few times in the past, the average CG in the long term in Aus has been 9% - don't forget that dreaded average just showed up again which means that to average 9%, some areas, places will have gone up more, and some less.
And yes, SOME will drop shortly. NOT ALL
Short answer, yield, due diligence, search the forum, and look at a hundred properties Before you decide.
jahn

 

[Vdoubleyou]

How is Yield calculated?

I have a stupid question, but I'd like an intellligent answer
What is the simplest way to work out the yield?

A few answers have been given on how to calculate yield:

Yield is "rental income per annum" divided by "current value" of property.

e.g. $250k IP, returning $220 per week rent, equals $11440 divided by $250,000 That is, 4.57%

To me $11440 divided by $250,000 comes to 0.04576 (You could multiply this by 100 though)

I have always calculated yields as purchase price plus costs divided by yearly income.

If we use the above calculation on the figures in the first example (not including costs because I do not know them)

then we would get:

$250000 divided by $11440 = 21.8531

This does not seem correct to me either. Also if you had a higher annual income your yeild would decrease

To me the way to calculate a basic yield would be:
100 divided by purchase price (or current price) multiplied by annual income.

example : 100/$100000*$10000 = 10%

what do you think?

 

[Jimmyjamjars]

Yield

VW,
For basic gross yield calcs, I have always used the formula
Weekly rent X 5200
Purchase Price

JIM

 

[see_change]

As comments about low yields on this post was one of the reasons why I did the following post , I thought it would be worthwhile posting a link here

http://www.somersoft.com/forums/showthread.php?s=&threadid=11656

See change

 

[voodoo]

OK, so correct me if need be.

there is a place down the road being advertised at returning
8.5% net, it is for sale for 165k.

Are they saying this place is clearing $269 wk???

eg
165k x 8.5% = $14025 divided by 52 = $269

is this right? if so I may have to purchase it.

 

[Vdoubleyou]

To me that is not quite right,

$269 x 52 (which assumes being rented all the time) = $13988

100 divided by $165000 multiplied by $13988 give me 8.47% which is close to 8.5% but that is gross, not net (I think I'm right anyway)

 

[voodoo]

Hi vdoubleyou,

you may have missed the point of my question,

they did not quote a weekly dollar figure,

They said returns of 8.5% net, so i presume this is on the 165k purchase price

so 8.5% of 165k is ??? $14024.9 pa or $269wk

do you agree?

regards

 

[Vdoubleyou]

Yes, I agree, you are correct, this is gross not net, so I believe they are misinforming you if the say it is net.

Sounds like a pretty good deal anyway

good luck!

 

[abcdiamond]

Originally posted by voodoo
there is a place down the road being advertised at returning
8.5% net, it is for sale for 165k.

What area is this in ?

Is it Residential or Commercial ?

That sort of return sounds right for commercial property in this area.

If it is Residential, it sounds like a reallky good deal.