Yield question

Dear All,

I'm just wondering what everyone considers to be an "I can live with that yield"? I don't mean an IDEAL yield (hey, wouldn't we all love 8% plus!) I mean, when you're doing your calculations, you tell yourself: yeah, that's not bad. I can live with that.

Cheers and thanks,

Harriet
 
Hi Harriet,

Good question, I personally like to aim for 7.5% gross as minium. though I am finding that I am continually losing out when making offers. However I figure that eventually I will get a property that returns a reasonable yeild + reasonable cap growth.

It can be frustrating, though it is often said you make your money when you buy so patience is necessary.

Cheers Wayne
 
Harriet

7.5% yield? Which state is that in? I have looked at hundreds and the best is 6.5%?? Maybe I'm concentrating on the wrong state?

ott
 
yeild depends on if the property is deemed a capital growth or cash flow property.

obviously the capital growth ones you can live with a lower yeild as they have more growth.
where as the cashflow types you need a higher yeild to compensate for the lower growth.
 
I have a stupid question, but I'd like an intellligent answer :D
What is the simplest way to work out the yield?
Thanks, if anyone feels like telling me.
 
G'day Celivia,

Just heard this defined today (Jan Somers workshop in Sydney).

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%


Subtle point there - I had always tended to think that "rent" divided by "purchase price" was the yield (still has some merit, I think....) - but if Jan uses "current value" rather than "purchase price", who am I to argue??? ;)

Hope that helps,

Regards,
 
Hi Les
Good question
How can the yield be calculated to a number/price, that is a figure that is non-existent. That is, if you paid 200k, and its value is 260k, it is not a figure that is out of your pocket, or in your pocket (damn :eek: ) until you sell it, etc ?
jahn
 
Thanks, finally I know now, couldn't find it in the books I have, so I thought it must be a well known formula that no-one would bother explaining.
I'm probably the only one on the forum that didn't know. :D
Thanks again, regards.
 
Hi Les,

I will have to disagree with Jan here. I have always calculated yields as purchase price plus costs divided by yearly income.

If you use the current market value then you are not getting an accurate picture of YOUR yield.

That is the amount of money you are receiving for what YOU have invested in the property. Since you didn't actually pay current market value (unless you just purchased) it just doesn't seem like the correct way to calculate it to me.
 
I like to look at my yield too, only because it can be a very good litmus for what the market is doing. In 1994 at the end of recession I bought a unit returning 8.5%. Current yield on present value would be 5.5% not because the rent went down but because values went up. 8.5% yield in Sydney should have been screaming at me "Buy now. Buy now." Sure enough by 1996 the unit was rising fast. If only I'd bought ten of the damn things. Prices doubled in five years. Two OTPs next year will yield me about 6% on purchase price but less than 5% on current value. I like to get above 6% in Sydney but this will vary from state to state (and with interest rates of course).
 
Average Gross yields are historically a good 4 or 5 percentage points higher than the interest rates.
They may fluctuate a bit but history shows us that it will always come back to that figure.
They are like bonds in that way.

This suggests that either rents are going to have to go up or prices are going to come down unless for some reason its different this time. I dont see what that could be, but if anyone has any ideas I'd like to know.
 
Hi all,

L Bernham

"Average Gross yields are historically a good 4 or 5 percentage
points higher than the interest rates."

Ahh, where would this be??? During the 80's when interest rates were 12%-15% you were not getting yields of 16%-20%. They were around 8% for an average house, and that was BEFORE the boom of the late 80's. A little more information please on what you mean.

bye
 
Like I said "average". There are times, like in the 80's when interest rates were so high that yields were obviously below that.

I'm talking about the last century. Its a standard rule that doesnt just apply to Australia.

After times of high capital growth, average yields tend to drop, often quite a bit as the expected future growth is factored into the return.
Its one of the reasons property is cyclical.
 
Hi Celivia
Agree with Les and can I add that gross yield is at best a rough guide only.

I like to take the next step and work out my nett position in $ each year. If you have to subsidise payments and other outgoings out of normal income you need to prepared for this and for the usual unpleasant surprises such as unanticipated vacancies and repairs. Everything suffers harder use in rental properties and tenants are highly mobile. Just a case of calculating all outgoings and the new tax position, but be conservative, Murphy's Law evidences seems to crop up a lot in this business.

If it is useful to you, I find that sellers like to talk about gross yield and capital gain. However you're the one who has to meet all outgoings and under 6.5% gross return on purchase price is a fairly courageous position IMHO.

Hope this helps.:D
 
Originally posted by Les
G'day Celivia,

Just heard this defined today (Jan Somers workshop in Sydney).

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%


Subtle point there - I had always tended to think that "rent" divided by "purchase price" was the yield (still has some merit, I think....) - but if Jan uses "current value" rather than "purchase price", who am I to argue??? ;)

Hope that helps,

Regards,

I guess there is two different yields? one is the current return on your investment which would use the actual price you paid less costs - the return you are getting from your past investment, the other yield would be mainly relevant for when you are buying/selling the property, ie the yield you would likely get if you invested today. I guess the second one that is most useful?
 
It has some value as a starting point in comparing possible purchases.

Some tinker with it to suit their beliefs and circumstances. For instance, some deduct 2-4 weeks vacancy before performing the calculation. Don'y know why, when they could just as easily crunch all figures or at least best estimates.

IMHO not many owners use the term post-purchase. Knowing actual returns is more instructive (sit down first).:D
 
Originally posted by Folken
I will have to disagree with Jan here. I have always calculated yields as purchase price plus costs divided by yearly income.

If you use the current market value then you are not getting an accurate picture of YOUR yield.

Yield is defined just as how Jan Somers and others describe it, current market value divided by yearly rental income. What you mention is more or less the return on investment and other factors influence it as well. For example if you took out a mortgage then you may only have put up as little as $30,000 of your own money, factor in interest as an expense and then technically your return on investment is based around your original $30,000.
 
L Bernham

I Would be interested in where you get average gross yields being 4-5 % above the interest rates info from.

There are places you can get yields like that at some stages of a cycle, but I would be interested in you source for stating that.

see change
 
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