YIP September Issue - yield calcs?

[gronk007]

Hi, Picked up Sept issue of YIP, on Page 28 there's a breakdown of Michelle's portfolio across her 10 properties over the last 9 years.

Impressive indeed, but I'm just trying to work out how they calculated a 6.6%yield on one of her properties:

- purchase price $175,000
- Amount borrowed $157,500
- Current Value $330,000
- Rent Per Week $280 per week
- Yield 6.6% (doesn't say gross or net)

Even allowing some juxtaposition of some management fees, I don't see how they get 6.6% as yield, gross or net.

Thanks for any help in advance.

Only reason why I ask is I have a property with a similar profile, and I've never considered it as a 6.6% yielding property

 

[matto_]

I cant seem to get 6.6% either. Wasnt sure whether it was calc-ed on purch price, amount borrowed or current value.

Based on the figures above I get 8.3% on purchase price, or 4.4% on current value.

 

[Ed Barton]

I cant seem to get 6.6% either. Wasnt sure whether it was calc-ed on purch price, amount borrowed or current value.

Based on the figures above I get 8.3% on purchase price, or 4.4% on current value.

Must be net yield on purchase price. Pretty sloppy not to supply the details.

 

[matto_]

which raises a pertinent point.

Do people calc yield based on original purchase price OR based on current value.

I can see benefit in calculating both figures.

 

[Brady]

I personally calculate yield on Purchase Price as that is what is relevant to me.
But will also do a CF calculation aswell.

But no doubt different calculations are done, depending on whos calculating, seller or buyer... usually to show the best figure

 

[HotRod]

which raises a pertinent point.

Do people calc yield based on original purchase price OR based on current value.

I can see benefit in calculating both figures.

For my own purposes, I work on net yield (all income minus all costs inclusive of interest) based on total borrowings plus deposit.

When you would come to sell, it would be gross yield on the selling price. (you have to leave it up to buyers to work out their final net position).

 

[Ed Barton]

which raises a pertinent point.

Do people calc yield based on original purchase price OR based on current value.

I can see benefit in calculating both figures.

Current value.

My parents have properties returning more than 100% yield if you use purchase price. What does that tell you about the performance of the asset? nothing.

The standard is current yield against current value. It helps you to make decisions about the performance of the asset and whether to sell, buy or hold.

 

[HiEquity]

Allowing 20% of gross rent for outgoings, it looks precisely like net yield on purchase price.

Whether you use purchase price or current value IMO depends on the purpose the calculation will be used for and the strategy / goals of the concerned party. It's in the eye of the beholder or beer holder, as the case may be!

 

[HotRod]

Current value.

My parents have properties returning more than 100% yield if you use purchase price. What does that tell you about the performance of the asset? nothing.

The standard is current yield against current value. It helps you to make decisions about the performance of the asset and whether to sell, buy or hold.

Que?

That 100% return tells you that your parents don't need to do a thing except pay the tax man each year (which contrary to popular belief is a GOOD thing)

So if they are making a 100% yield on the purchase price (which I would assume would be close to the loan amount) what sane person would sell it if it might be yielding 3% on the current value???? If your parents have paid off the loan, they would be getting an infinite return.

You need to look at the net yield of a property on the current outstanding loan/tied up cash to truly see where you are sitting.

The current yield on the current value should mean nothing to an owner, but everything to a buyer.

The only exception I can think of is if the property is NGed and you are hurting and the rent drops (and yield drops), adding more pressure to your bottom line. But your yield ca also drop because the value has increased, which can only be a good thing.

 

[HiEquity]

Que?

That 100% return tells you that your parents don't need to do a thing except pay the tax man each year (which contrary to popular belief is a GOOD thing)

So if they are making a 100% yield on the purchase price (which I would assume would be close to the loan amount) what sane person would sell it if it might be yielding 3% on the current value???? If your parents have paid off the loan, they would be getting an infinite return.

You need to look at the net yield of a property on the current outstanding loan/tied up cash to truly see where you are sitting.

The current yield on the current value should mean nothing to an owner, but everything to a buyer.

The only exception I can think of is if the property is NGed and you are hurting and the rent drops (and yield drops), adding more pressure to your bottom line. But your yield ca also drop because the value has increased, which can only be a good thing.

I don't think it's as simple as that HotRod. If you had a property that was yielding 1% net on current value, would you not sell it so as to be able to buy a property that yielded 10% net on current value? Sure there would be transaction costs but there are times when the opportunity cost on the yield becomes overwhelming. A couple of years of that yield differential will likely eat up the transaction costs and then you will be well ahead. And the CG prospects of the higher yielding property could well be better now through the prospect of future yield compression where it's hard to see the 1% yield property dropping its yield any further...

Of course the third way is just to borrow against the CG in said property and use those funds to buy the higher yielding property, so as to avoid the transaction costs of selling. But the point is there are times and purposes for which current yield can't be ignored. And there is a time to sell as well as a time to buy...

 

[jackbak]

So if they are making a 100% yield on the purchase price (which I would assume would be close to the loan amount) what sane person would sell it if it might be yielding 3% on the current value????

A sane person who may be able to get, say, 8% yield on a different investment. The yield based on purchase price tells you nothing about how the property is performing in today's market.

 

[Ed Barton]

Que?

That 100% return tells you that your parents don't need to do a thing except pay the tax man each year (which contrary to popular belief is a GOOD thing)

So if they are making a 100% yield on the purchase price (which I would assume would be close to the loan amount) what sane person would sell it if it might be yielding 3% on the current value???? If your parents have paid off the loan, they would be getting an infinite return.

Yes the rental is returning 34m a year, close to an infinite return. < sarcasm in case you didn't notice>

oh dear, you don't know much about what a yield is used for, do you?

You need to look at the net yield of a property on the current outstanding loan/tied up cash to truly see where you are sitting.

oh so now you change your tune. is it current or purchased?

Let me give you a little hint. you use the current price to yield to determine whether to buy hold or sell.

The current yield on the current value should mean nothing to an owner, but everything to a buyer.

oh dear again.

 

[HotRod]

Yes the rental is returning 34m a year, close to an infinite return. < sarcasm in case you didn't notice>

oh dear, you don't know much about what a yield is used for, do you?



oh so now you change your tune. is it current or purchased?

Let me give you a little hint. you use the current price to yield to determine whether to buy hold or sell.



oh dear again.

Thanks for your concern. But as someone pointed out earlier, each person uses yield differently. The thing I look at is my net yield on current loan/cash tied up (this assumes that you have IO loans so this should be the same as the purchase price).

Still dangerous to base any decision to sell based on the current yield to current value alone.

Regarding 1% v 10% yield on current value taking away the hyperbole it's maybe more like 3% v 7%. The tipping point would be the breakeven with the transaction costs and probably assumes that you are selling and buying like priced properties but also needs to take into account things like CGT.

Eg. you have a $500K property earning $15Kpa but can get one paying $35Kpa. You might have $40K in transaction costs (fees/SD) and say $50K CGT. You'd have to hold the new property for 5 years to claw back those costs.

A lot can happen in those five years with yield possibly dropping again. Rinse and repeat after 5 years?

Me, when buying I will look at the gross yield of properties to the purchase price. Once in my portfolio, I just need to focus on the current net yield of the property to the purchase price. If it is positive and rising I don't give a rats what its current gross yield to value is. It's making me money each month.

 

[Mr Sparky3200]

Its very clear to me that 6.6% must be net yield!