Confused about yield

Discussion in 'Investment Strategy' started by Piage, 30th May, 2020.

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  1. Piage

    Piage Member

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    Hey guys,

    I'm confused about how yield is calculated.

    I believe in general the formula is:

    (Rent-expenses)/(property price)

    Fair enough, but I didn't pay For whole cost, I only put down say 20%.

    So my real yield wouldn't it be:

    (Rent-expenses)/deposit?

    It also makes more sense cause the only way to vary the yield is by playing with the 2 variables rent and expenses.

    With the first formula, if my property appreciate, my yield reduces. But I've still use only the deposit as capital.

    Thanks guys!
     
  2. spoon

    spoon Well-Known Member

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    I only care about how much cash I get after all said and done. Also how much I can pocket when it's sold. As rent could change over time, and there might be unexpected expenses, may it be a burst hot water or an increase in land tax, so in the long run, a good CG property is important.
     
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  3. Piage

    Piage Member

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    Ok, so the first formula is rental yield, the other one is ROI.

    In almost every discussion, people use yield.

    I'd have thought ROI is more important and provides a better way to compare investments (not just related to real estate).

    What am I missing?

    Cheers!!
     
  4. Scott No Mates

    Scott No Mates Well-Known Member

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    NPV & IRR is the acknowledged measure as it allows returns to be compared on the same basis across different investments, asset classes and timeframes. This is not used by most punters.

    As everyone's investment profile is different, access to capital varies, risk appetite etc using ROI becomes very subjective and personalised.
     
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  5. Spiralkut

    Spiralkut Well-Known Member

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    The yield is yearly rent / property price times 100. So if you receive 350 a week on a 300k house it's 350X52 is 18200
    18200/300000 is 0.06
    0.06 X 100 is 6% yield.
     
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  6. Fargo

    Fargo Well-Known Member

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    I think you have missed the point of the question. It is more a chicken or egg type quandry. It is confusing and their is no definitive or right or wrong answer. The answer will depend on the objective which may determine what price you use. Which depends on where and how you see value.
     
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  7. MTR

    MTR Material Girl Premium Member

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    Also one thing is never mentioned this 6% yield is gross, not net

    So in real terms you could be at 3-4% net
     
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  8. Fargo

    Fargo Well-Known Member

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    I dont only care about how much cash a property gives me Residential gives very poor cash on cash returns, but can give very low risk, high leverage, as long as it pays for itself, and funds high returning investments. I mostly care about the ability property gives me to efficiently access capital, and leverage into high growth. high return assets, while securing and protecting capital base, reduce tax, and compound net assets. I am not only concerned about the CG of the security , I care about the return on the funding, and the options and freedom it gives me I mostly care about what the bank will give me in exchange for for an interest in the security.
     
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  9. Piage

    Piage Member

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    Thanks guys. I'm asking cause I have an IP. The net yield is low, 2.something.
    But if calculate the ROI, it's almost 10% and in the current economic landscape, I think it's not bad. Of course I need to factor CG and who knows what's going to happen in next few years.

    I've always been happy with the investment given I've used the ROI. However here looks like everyone uses yield, and I started questioning myself as I'm not an expert by any means.
     
  10. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    Ideally your rent would also go up with the value of the property. However there are times in life when property values go down or up and it skews with static formulas.
    However in my personal opinion it is beneficial to use the original cost of the property so you can show your yield going up over time when looking at your own portfolio then consider capital growth as a separate item.
     
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  11. NHG

    NHG Well-Known Member

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    Depends if you're an agent selling off the plan, or if you're trying to work out a fairly legit return on expense.

    I divide Income (rent) by Expenses.

    Expenses being all costs associated with the house to obtain said rent:
    1. purchase price.
    2. renovations.
    3. on-costs such as legal fees, stamp duty, etc.

    As above however, you'll find this number is somewhat arbitrary other than doing a quick back of the envelope calculation to work out which areas to target.

    Net returns is really the important number. I also tend to focus on cash-on-cash return, and profit on turnover (I treat housing as a business).

    10% gross yield in QLD and NSW may seem the same, but with higher insurances, and Council rates, they lead to 2 different results. Also the comparison in year 3 may differ as an older building may require more maintenance, new hot water system, underpinning, etc.

    How close is the building to requiring a new fitout (renovation), have you budgeted for this when looking at a brand new 5% return vs a 6.5% return on an old build. Is the 1.5% different really going to make up for the $20k you're about to pay to upgrade the kitchen and bathroom?

    The other thing to note, is just because you bought your house for $1,000 pounds in 1955, you really should be looking at what it is worth now.

    I see that with mum and dad developers all the time. "I can build these 2 townhouses for $1M each... Yeah, but your land isn't worth $350k anymore, it's $1.5M..."

    So to simplify all of the above...

    Income / Expenses.
     
  12. pattoman

    pattoman Well-Known Member

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    Because you are paying interest on the other 80%, it's not free money.
     
  13. Beano

    Beano Well-Known Member

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    The net yield tells you what you are likely to make so if the net yield is say 6% and funding cost is 3% then half of the net rent is profit (before tax)
    Return on investment is really dependant on the funds you put into the investment.
    If the net yield is more than funding cost then the ROI will be higher with less deposit.
    When buying a investment property I would not even bother looking at the ROI as my equity will mostly come from equity (increasing debt on current portfolio)
    Maybe I could put 1 cent in ....my ROI would then show five billion % :)
     
    Last edited: 21st Jun, 2020
  14. Jana

    Jana Well-Known Member

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    Interesting. What if the 20% deposit comes from equity redraw of previous house? So yield become infinity??