Difference between Property Yields and Pos/Neg Cash Flow?

Like the title says, I don't quite understand the difference between property yields and positive/negative cash flow. Could someone lend me a hand?

 

If the property makes a profit or a loss after all the income and costs are considered, it would be cash flow positive or negative.

The rental yield is the ratio of the rental income to the value of the property (there's multiple interpretations of this, but that's the one I prefer).

If you're asking about a relationship between the two, there certainly is one, but it's not a direct relationship. There's more to owning a property than just the mortgage. Other holding costs like rates, insurance, management, maintenance and many other costs should also be considered.

 

Thanks for the help

 

Thanks for the thread @kirsty2711 and your input Mr. @Peter_Tersteeg

I will search some formula's on google.

 

Gross yield = income / current market value (IMHO a useless number at it disregards expenses which vary from property to property).

Nett yield = nett income / CMV

 

When the tenant pays the expenses the landlord may not even know the gross yield only the net yield

 

Positive 'net yield' properties are near impossible to get in most growth locations in the current market conditions (and the market conditions in Australia for an incredibly long time already).

So you would be looking for a combination of net yield + tax deductions to bring it up to CF+


Eg - Using the 3 ways to get a higher CF

1. Try for higher yield
You might try for 4.5% gross yield (which is roughly achievable in outer ring of some major CBDs - prob not Syd/Melb right now)
Interest is roughly that rate (bit higher for variable non discounted and bit lower for fixed).

2. NG
After 30% costs taken off your gross yield in previous part, you are left with about 3.15% net yield which means a loss of 1.35% after costs inc. loan interest and around 0.45% back in tax deductions (for this specific example assuming tax rate of 33%)

3. Assuming newer house might have 10-12k/yr in depreciation, which for a 33% taxable income means around 4k/yr in your pocket without any outlay.


So lets say you got a 500k property like this.
1. You would make a loss of around 6750 per year
2. You would get back from tax (ie NG) about 1/3 so 2250
3. You would get back about $4k from on paper deductions (depreciation)

Total cash flow would be around -$500/yr (I would consider that close enough to neutral CF.


Points note
- Don't buy a property based solely on depreciation - take it as only one factor
- Don't buy a property based solely on tax (ie NG) - take it as only one factor
- Beware of buying a new house as the building actually depreciates in value in the first few years the same as a boat or a car - it is the land component that appreciates over time, so you might want a 10 year old house instead of a 1-3 year old for a good compromise.
- The depreciation is not exactly 'free' money, and you will have it added back on to the final gain of your property when you sell it and have to 'pay it back', although since the 50% discount will generally apply you actually do get a chunk of free money, plus (and this is a big one) money depreciates over time so the longer you wait until you pay it back the less you are actually paying back, and the biggest plus is that if you can delay outlaying cash until you sell it, you can afford the cash flow to buy more properties and get more growth in the mean time and this can not be understated.


"The Truth About Positive Cash Flow Property" by Lomas explains this stuff well and is definitely worth a read.

Semi-related (and extremely important) - if you buy in a location that is towards the end of a boom, your yield is going to be terrible and you will pay a lot more and for a long time until the rents eventually catch up but if you buy after a 5-10 year mostly flat period, you will get much better yields plus the boom will come sooner so it is a win-win. However if it is one of your first 2 properties, you really need growth before CF so it 'might' be a consideration to buy during a boom but you better hope it doesn't turn out to be the end of the boom because waiting 10 years for growth AND waiting for a lot of years to even become neutral will be much worse than waiting 3 years for growth and having a much higher cash flow in the mean time.

 

or NOI

 

It makes me cry when I see the net yields in Sydney and Melbourne especially when they don't allow CapX (to maintain income ) in the net yield
I don't know how people can afford to buy and own more than a couple of properties in this market.
It may be a decade before they become cf+

 

I'd hate to confuse the issue with an IRR call taking into account my own cost of capital, market analysis, WALE, risk etc to determine my personal discount factor.

I've had enough today looking at turnover rent calculations

 

Thank you so much for all of the effort you put into your answer which was very god by the way.