Is Rental Yield Really That Important?

Hey guys,

I'm looking into the finance options for my next purchase (potentially). Everyone is banging on about yield and how it's super important, especially in the current climate. I think it's a bit overvalued.

In my understanding reasonably high rental yield is crucial to ensure you can hold onto the property for sufficiently long time. However if lenders won't lend me 500k for a property, I don't think having an extra 1% yield on my other two properties will help much. For example, let's say I own two properties at 4% yield and total debt is 1M. Now let's compare that to the same scenario but 3% yield. The first scenario would technically mean 10k higher income in the borrowing calculators. And that means I can borrow 60-70k more compared to 3% scenario. Bugger all.

Now let's say the difference in rental yield is more significant, maybe 2%. That would give me extra 150k to borrow. Not a big deal again. How about the difference of 4%.. Now I'm buying in small towns, where economy is not as diversified and that's taking on more risk.

Am I missing something?

Thanks!

 

Yield keeps you in the game. Growth is the reason to be in the game.

(ie unrelated to your borrowing)

 

Pretty much

 

Possibly not from a borrowing perspective but I would rather have the extra cashflow.

 

I guess the other question to ask is, how is yield calculated? Is yield calculated on purchase price, or current market value?

I can see why you'd want to calculate it on market value to see if your money is really working that well for you and if there are better investments, but if you're just holding, then perhaps it's not important?

 

But the question then boils down whether we should buy in regional places and have extra 30-50$ pw more or in large capitals with more diverse economies and larger populations. I think the likelihood of a major capital having a greater capital growth over time is much higher.

 

I feel a bit stuck early on my journey. It doesn't look very likely that I can borrow for my next purchase unless I go with Liberty or Pepper (and after that I would be stuck even more). So I thought, OK, I made a mistake by purchasing relatively low yielding properties. Then I played with borrowing calculators a bit trying to figure out where I messed up only to realize that the yield doesn't really matter that much. I think it's overvalued. Of course as long as you are comfortable with your holding costs and can afford to hold your properties long enough.

 

If the pervasive view is that returns on your invested capital no longer matter then we really are in for a hard landing!

 

Regional areas have growth as well. Can't say it's been like Syd or Melb. There's also people at different stages and different style of investing. You're starting out and in need of growth, others may already have the growth so the higher yeild works as an income, others can use the higher income yielding property to pay off the debt and turn them into a passive income instead of hoping for negative geared properties to grow. King of paying down debt from high yielding is @euro73.

 

Don't get @euro73 started. I hear NRAS already

 

Yeah that's his strategy as well as duplex. But the point is a property that can put cash in your pocket allows you to pay down the debt to increase the return.
Growth is awesome but doesn't always happen. What will your plan be if you don't get any growth from your 2 properties over the next 5 years, or worse they drop in price?
Holding negative geared properties over time without growth sucks balls.

 

From my memory, euro was saying that one of his NRAS properties would have around 10k py positive cash flow. So it would take around 10 years with one of those properties to reduce 100k of your debt, so you would need at least several of them to have any meaningful impact on your borrowing capacity. Only to find out that in 10 years non of your apartments had any growth as they were in markets already flooded with apartments.

 

I think you have a good point but it's the internal return that matters (RY + CG). Of course, CG part is speculation but without CG property is just not a good investment.

 

I know why your looking at it the way you are, but you should also be expecting a return on money , what if capital growth stalls.

 

I'm not sure on his nras properties or duplex methods and locations, I was just referencing the power of paying down debt with cash cows. His methods are faster than some and you can read his threads as he posts all figures, he's like Dustin Hoffman from rainman when it comes to numbers.
Using cashcows to paydown debt is a strategy but don't underestimate what it can achieve over a long time frame, also it doesn't cost you anything to hold so you can use additional spare cash to speed up the process or to live life and enjoy.
Margerat lomas is queen of this method.

 

I was actually just reading her book the other day (20 must ask questions). She is saying in her book that one of her criteria is not to invest in towns with less than 15k population. If the town has 15k or more ppl, it meets that first criteria Obviously she's a multimillionaire and did extremely well, but boy I'd never invest in those places, never even heard of them.

How about shares to pay down debt? Hm, that would take two generations.

 

I would like to look at the borrowing perspective. Specifically serviceability calculations and why the amount you can borrow is so vastly different for such small total dollar changes in rental income.

 

I think you want to be real picky with this product, granny flats, dual occs etc are not all just accepted or the same everywhere, like most things, you need to do some proper checks.

You need to know who wants them, for rentals and re sale, how much, will it cause issues etc...

 

Well growth is what she is chasing along with cashflow.

Shares are great. Wish I knew more about them years ago, starting investing late last year as their easier and better returns. I say easier now as I haven't experienced a crash yet, I'm sure I'll crawl into a ball, suck my thumb and go to my happy place when they do. I advised my wife to slap me out of it when it happens and buy lots more.

 

Lol. Did you buy an ETF? Is it around 5% dividends?

I know nothing about shares, maybe the right time to start researching. I remember reading a study comparing performance of property Vs shares over the last 30yrs or so. Basically they said property performed better than shares, however shares with reinvested dividends performed marginally better.

At least I wouldn't have to hear "you don't service with us sir" again.

P.S. I know Margaret was chasing growth as well but she must have had a crystal ball to predict spectacular CG in Moolongabaroodyanawala.