Calculating depreciation as part of yield

How do you estimate the amount of depreciation you will get on a property?

Deposit is in the bank, pre-approval is in place and I'm chasing yield. The area's I have been looking at generally have 5 - 6% yield, I was initially looking to increase yield via dual occ but now turning my mind to depreciation on a newer property as a potential for increasing yield without the headaches of managing two tenants.

 

Just make sure the potential for good cg is there. Otherwise this buy won't be helping you build wealth anytime soon if that's your ultimate goal. Just my opinion.

 

I use a BMT calculator app on my IPhone. You could also use their site.

 

I don't usually include depreciation in my calculations, but see it as 'icing on the cake', especially since it only comes around once a year (tax time).

 

If u need depreciation to sustain the investment it probably isn't a good investment for you

 

Some people just like to get the full picture when comparing the numbers on more than one property. Newer isn't always better even with depreciation. Also, some like to get my tax as a lump sum, others like to have it in their own pocket rather than the taxman's. Each to their own. Depreciation is still interesting to look at when you're number crunching.

 

Potential for CG is good, I am sacrificing a better yield to buy in the area because it has new infrastructure going in as well as commercial development happening.

I don't need it to sustain the investment, I am looking at it as an alternative to using a dual occ to increase yield and if the figures stack up it will allow me to broaden my search to newer properties without dual occ potential.

I think it's important to include because, all othet things being equal, buying the 20 year old property that gets you an extra $20 per week in rent might mean passing on the new property that has a $40 per week depreciation benefit.

Any thoughts @Depreciator?

 

I never use depreciation in my yield calcs.. Yield is just a rule of thumb number.

Depreciation comes into play when working out the finer cash flow details..

 

Do you include body corporate fees when calculating yield?

 

Personally I think you would have to.

What kind of body corp fees are you looking at..? Hopefully its nothing to exorbitant. I never understood how some investors buy into buildings that have fees of 10-15k/year. That's insane if you ask me.

 

HAVING MY FIRST COFFEE SO EXCUSE THIS POST IF IT IS NOT CONCISE!

I usually work off a gross yield.
Rent annually (50-52 weeks depending on who you ask) divided by purchase price.

I have a little excel doc with the rental schedule for cash flow.
I have a column for weekly and annually
So:

Rent

Less:
Insurance
Repairs
Rates
Water
Body corp
Agent
land tax (if applicable)
Interest (assuming interest only)
Equals
Net cash flow pre tax
Less:

Depreciation
Tax payable/refund (marginal rate)
Equals
Net cash flow post tax

I set this up in excel.
It has some other variables that auto calc such as stamp duty etc.

I like to know my pre tax cash flow as without doing a Payg variation that is why you will pay out of pocket.
Or in the case of positive Cashflow properties that is what you will receive before you pay the tax man.
Then again your property may be positive Cashflow pre tax, but after depreciation it may break even/ be negatively cash flow for tax purposes..

In my calc I only have to input purchase price and rent per week. Everything else prefills.

So I use this when doing quick initial cash flow estimates.

Also, I don't invest to "save tax".. I'm trying to create wealth.

Only reason I bring depreciation and tax into the cash flow equation is because I want to know if I am going to need to cough up some tax out of my pocket to pay the tax man - as a consequence.
But I have that under the line.

If your personal budget and circumstances are tighter you may take more notice of this part as if your property is neg geared you may require as Payg variation and that cash flow on a weekly basis to make the deal work.
Horses for courses...

Coming back to yield, I use this as a rule of thumb for filtering through potential properties..

Something you need to be aware of is this:

Do not take the current rent per week or the quoted amount on the sales add as the rent to use when working out yield.

You need to have specific knowledge at the area you are looking at and the type of property, specifically what that type of property rents for in certain conditions. It is this I use for my yeild calcs.

Here is a real scenario from one of my properties:

Agent: for sale, great investment, renting for $350 per week
Yield on face value 5.7%

Insights:
Sales agent is from out of town, doesn't know the sales or rental market
Property of those types (build and bedrooms) can fetch up to $550 per week. I worked off a lesser amount as repairs per below needed to be done.
Property needs superficial or cosmetic works done only.
So after working out what I really paid for it and the rental increase the correct yield is 8.45%

So initially 5.7%
Actual 8.45%

Would this result in a different buying decision? I think so...

It is such knowledge that enables you to make such decisions as:
1. Do I lend 80% or 90% LVR
2. Can I go P&I due to strong cash flow (ignoring other factors and strategies)
Etc

So although "yield" is a simple calc and one used as rule of thumb, there are still layers of knowledge behind that "simple" calc that can have significant decision making consequences....

If you want a copy of my excel sheet (warning it is simplistic but saves you creating it) just PM me with you email address.

Cheers
GG

 

Hello GG. Thanks for the long reply....

Is there a typo? I always thought Depreciation (if anything) will always give you money back so will turn a negative return to positive, not the other way around....

 

Unless you get your accountant to do a Tax Variation for you. In which case you get your Tax Return in your pay packet each week to boost Income.

 

I have been looking at houses and townhouses. To calculate the yield I have been dividing the annual rent by purchase price for a house. For a TH I have been minusing annual body corp from annual rent then dividing by purchase price.

So far I've found that in general body corp of more than $60 per week ruins the deal.

Everything I've found that on face value has good yield is an 'offers over' price. In one case the price went from offers over $450k up to an asking price of $490k.

 

Hi @Tim & Chrissy It sounds like you’re not looking for a property deals that are going to put like $100 back into your pocket a week anyway, so if that’s the case, why not worry less on the yield (individual situation permitting) and buy something that might be slightly negative or somewhere in neutral territory but has some room to add value and medium to long term will also likely have god CG..?

 

Because he has 4 kids under the age of 10 which kinda destroys serviceability... if he doesn't get a half decent yield there's no way he can continue to secure loans... I suppose there's the commercial property path he could pursue but that's another kettle of fish...

 

Oh ok.. i didnt read that in the thread so you must have insider infomation

But @Tim & Chrissy is that what your finance broker advised you after looking at your situation?

 

Thanks, I'll PM you. I have been looking at North Brisbane around Kallangur however there seems to be a lot of places up for rent at the moment, especially TH's. Because I don't have the local knowledge I'm finding it difficult to figure out if a place is underachieving on rent.

 

Long story short:
CBA, Qantas CU and Aussie said no more.
Liberty gave preapproval for $600k purchase with rent of $660 minimum.

I have $120k savings.

Due to 4 kids + self employed wife with less than one years worth of trade in the banks eyes I have 5 dependants. 5 dependants = $1,050 living expenses per week + whatever additional expenses they find in my bank statements i.e. school fees, sport fees etc.

 

Woah... now THATS a situation...I see now why yeild is important...All i can say is... hats off to you mate. Amazing, amazing effort on your part. Its really people like you who are inspiring, and not all the whingers out there.