Is Rental Yield Really That Important?

Euro73 has covered a lot of the fundamentals.

It really does come down to all those pesky formulas.
An important one most don't take into consideration is the cash-on-cash return.

Also an additional 1 or 2% ROI is unlikely to help you out as you advance.

In the past the bank would lend money at say 4% interest IO, and count 80% of your rental income.

However they now base their calculations on approximately 7.25% P+I. Even if you're $4k positive geared, chances are the bank will look at it as -$4k on your income. 3 of those homes and now you're -$12k lower on your income.

At that point if you hit a wall you really need to look at wether it is worth keeping it or not. A hard choice if you haven't experienced the capital gains also. You'll need to calculate the difference of profit between selling and keeping, and then determine if the cashflow profit on that difference is worth it.

eg. difference between selling (after all costs) and keeping is say $40k. If you are $4k positive geared, then the actual difference is 10% ROI. Can you invest $50k elsewhere and get a better yield?

 

Awesome, a numbers man! Always pleasure reading your posts.

However let's consider these two scenarios. I have recently purchased two properties (Melbourne and Brisbane), both are detached houses and in high growth areas. Each of them is close to 500k and average yield between them is 4%. I'm seeing growth and high competition in those areas every week.

Now let's consider an alternative scenario, what I could have done. I could have bought 2 x NRAS properties (I believe they are around 500k mark as well?), with 8k +CF per year, reducing my debt by 16k per year. So if I bought two NRAS properties:

1. Banks still wouldn't let me borrow for my third property, so Liberty would still be my only choice,
2. In 5 years, my debt with two NRAS properties would be 90k lower. Big deal! Banks still wouldn't lend me for a third property (if the lending environment is the same),
3. NRAS properties are apartments that historically have had lower equity growth than detached houses. They are also in markets that are already suffering from apartment oversupply,
4. In 5 years I would be in the position where I would most likely have no equity growth (or minimal) and with the same number of properties and same capital base. My debt would be 90k lower, with less equity gained and future CG prospects would be lower as well.

 

Isn't the problem with nras that most major lenders will assess the already reduced rental income at 80%, so 64% rent, and you'd fail serviceability even more?

To add to that, if you have no non deductible debt ie. Rentvesting, then you'd get no gain in serviceability. Unless the goal with a nras property is to do P&I and pay it off?

Perhaps a cf+ property that doesn't rely on tax credits is the better way to go as it won't stop you growing your portfolio.

 

High yield generally means higher risk.

For properties it generally means the underlying asset is compromised in some way - otherwise they would charge a higher price.

NRAS, rent guarantees, dual occupancy etc - the capital cost is just higher than if you purchased without this.

Best way is to buy something with the potential to increase the yield yourself - renovations, granny flats, airbnb etc. If you buy the yield retail you will overpay.

 

Did she also pick Moranbah

 

No, because there wouldn't have been enough drivers from other industry to support the choice (but maybe you were being ironic?).

 

Its a catch 22 my friends.... read this and you will understand why......

Grow Capital First

 

It was a joke.... but seriously did she recommend Gladstone,?

If so, slap on the wrist with a feather.......call me cynical but some of these gurus seriously should not be recommending anything because they seem to get it wrong most of the time.... what's that other guy Ryder, and investors pay for this

while the gurus are chasing the hot spots, you have those that invested in 2 major cities... Syd and Melb over the last 3 years who have nailed it, really how hard can this be. Nothing secret, not rocket science.... follow immigration, jobs...

 

1. Its not a zero sum game. If you are at your capacity, you are at your capacity. But taking steps to not have to use Liberty or Pepper in 5 or 10 years time would still seem smart to me... Investing is a 20 year game, not a 20 month game.
2. 90K less debt is a start. But in 10 years that's 180K less debt. In 10 years time its higher rental incomes on the first 2, and higher salary hopefully, so your capacity starts to improve organically... You have to look at the end game, and if you dont take the small steps now to reach the end game , you dont get past the problem and end up sidelined from the game completely.
3. NRAS are not just apartments. NRAS can be done on any dwelling. NRAS are also not all priced at 500K. Ive done the majority of NRAS deals at 350-400K in fact. And Ive done some NRAS on more expensive stock. But this isnt about NRAS- this is about debt reduction. NRAS happened to be a tool I and my clients used effectively to generate the cash flow for the debt reduction. Dual Occ, or Commercial , or getting a big payrise or lottery win will do the same.
4. Respectfully, I have made huge growth on many of my NRAS purchases. This implication that NRAS equates to no growth is just nonsense...

You only have to look at my portfolio, and my current equity position and cash flow position to know that cash cows ( NRAS , Dual occ...whatever) can work exceptionally well, if employed correctly. Here are 3 examples for starters.

Castle Hill. Paid 620K. Valued at 850K before it even settled . Its NRAS approved..how did it manage to defy the urban myths and actually grow in value?
Elanora Heights Paid 610K. valued at 870K 2 years later. Its also NRAS approved..how did it manage to defy the urban myths and actually grow in value?
Bunya - paid 590K. Valued at 700K+ at settlement. Its also NRAS approved..how did it manage to defy the urban myths and actually grow in value?

These are 3 spectacular examples... other examples are more modest, but still impressive enough, nevertheless.

Port Macquarie - Paid 260K. Now valued at 300K within 1 year. I have 2 of these. They punch out a touch over 11K CF+ per annum, each.
Orange. Paid 365K. Now valued at 400K. Took 18 months to get that growth... Its only @ 10%, but its solid going, still....

Point is, the argument that cash cows cant grow is just false. In the end though, the simple difference in approaches and philosophies here is that there is an assumption of continuing, historical cycles of growth in your views, whereas I make no such assumptions. In fact, I assume/ plan around the unlikeliness of the growth cycles of the past 30 years being repeated - if for no other reason than the regulatory environment, and what is now becoming the political environment.

It means that when the rubber meets the road, while you need growth to make a buck. I dont. I can easily survive 7 and 8% P&I. You cant. I will build a passive income by reducing debt with or without growth - you can only succeed in doing that if the growth of the past 30 years continues... I can avoid ever having to sell in order to generate a passive income. You cant. That doesn't mean I wont ever sell.....it just gives me the luxury of not ever being forced to sell , because I'm unlikely to ever have more money going OUT than I have coming IN.

NRAS. Dual Occ. whichever poison you rpefer... they are cash cows producing 8,9,10K surplus income per annum..which I see as valuable for managing debt reduction and future I/O rate rises...

But as I said on a previous post, this is ultimately a decision only you can choose. I see the long term benefits of debt reduction. I see them as being more certain, and therefore more valuable than the "potential" of growth- especially when that "potential" is actively being attacked by regulators and politicians now. This focus on low yielding/high growth assets is all well and good, but if they end up being low yielding/low growth assets because the 30% I/O caps make it so hard for the next generation to harvest equity and repurchase and drive the prices up, what will you do then? Whats the Plan B if the big pot of capital growth isn't waiting at the end of the rainbow? If I end up with high yielding/low growth properties... Im still well ahead of the game... Ultimately, I am investing not speculating.

 

@euro73 What premium does the developer add for the NRAS ? How much lower then the market rent does a NRAS tenant pay ?

I've just viewed it as another rental guarantee scheme - you pay higher capital up front for it. That doesn't mean it cannot get CG - just that you are starting behind the guy next door that did not pay the premium.

 

Wow great thread. Appreciate you posting it here.

Wonder if there is a way to save threads somewhere on my user profile for further reference.

 

Have drawn equity out in lines of credits ready for opportunities.
Correct about never knowing where the bottom is but even if I can gain at 20-30% buy in that's awesome. Lic's BKI, whf, arg, mlt of the past still paid out dividends during the gfc and after, and as long as the banks don't go bust then I should be ok.
As long as I don't over Leverage and can maintain the servicing not solely relying on dividend income I should be ok.

 

If all conservative industrial companies go bust and are not paying dividends there is more to worry about then making money. You will likely be trying to improve the soil in your backyard so you can grow food to feed your family!

 

Martian style?

 

That question assumes there is a standard formula... there isn't.

Ive been very effective at delivering my clients under market value NRAS. I realise many other NRAS sellers haven't - but that's them, not me.

There is no rental guarantee with NRAS dwellings - you are required to compete for tenants like everyone else. The advantages are that you have a 20% cheaper product than the guy behind you, and an 11K tax credit as compensation... and better still, you only need to have the property tenanted for 39 weeks per year to receive 100% of the 11K tax credit . But its not a rental guarantee. To get the money you must have the property tenanted for all by 91 days ( 13 weeks) of the year, at a 20% discount.

PS - the guy behind you is over 100K tax free worse off over 10 years , just from a cash flow perspective - plus whatever compounding return you can get from that extra tax free money....

NRAS is pretty well done now. as far as opportunities to buy - you can find a handful of stock around the place, and a few resales... Dual occ is the next best cash cow. I have shifted my focus to that .

 

Perhaps a small goat herd or chicken pen would fit in your yard?

 

NRAS yields are lower v's non NRAS and so too are the deductions that are allowed for a NRAS property which affects cashflows BUT add in the state and commonweath incentives it changes things. Some are better and some worse.

Two identical properties will not cost the same since the original developer will sell a NRAS IP for a higher price.

Its just like DHA. They trumpet higher yields and guarantees but IMO they are gold plated. One day if its not DHA its value declines

 

Nah, live next to overweight people and eat them when things get desperate .