my gross yields have dropped

Shouldn't be a surprise but was. I was calculating the yields on some ips I bought at 8% + gross a while ago and the yields have dropped due to price growth to around 6% gross or less on current values. I have equity in these so I'm thinking I should be offloading them? I could put the cash and borrowing power into higher yield, and/or higher growth ips to move forward. I know there are some buying and selling costs but thinking about selling these sans agent and taking the rest of the year off work anyway, so less tax. Anyone doing this regularly, am I missing something?

 

Why are you basing the yield on current value?
Even if you are 6% is still high. Goto melb or Syd and be lucky to get 4's.
What is the desire to sell? Refi and buy another?

 

Won't everyone's yields eventually go down as properties gain equity, and profit margins would still remain the same or get better as debt is paid down and/or rents increase?

 

I'm basing it on current value because some of the properties are paid off, so current value is how much equity I have with that much return. I'm not comparing my portfolio to Syd, Melb or the moon as that's irrelevant. I'm going to be living (at least partially) off rent so looking at ensuring the money works hardest. I can use the equity to either buy in another area (such as Melb) that may have even lower yield but the market is still moving up, or equally I could sell and put the money into a higher yielding ip. Hope that makes sense.

 

Correct, I'm asking if anyone moves the money elsewhere at this point or is asleep at the wheel.

 

Fair enough @ellejay, although no where near this point would be interesting to see what other investors further along would do as well

 

I'd look at actual dollar amount instead of percentage terms.

Eg are you making x per annum and goal is y pa, does it really matter what percentage that is? If x pa is enough for your lifestyle, great. If its not buy more investments until it is.

 

Thanks Dave, that's true but for example, I've seen that I could sell one of my ips that's paid off, cover all costs have around $20-30k cash then buy another and still get the same weekly rent I was getting from the first property.

 

I agree should use current value if measuring opportunity cost of capital. 5-6% gross is not bad these days. Would you be comprising on price growth potential by switching?

 

No. These were bought as higher yield properties. Had 20% growth due to ripple but local wages etc wouldn't support much more growth. Hence I thought no longer returning exceptional yield plus little potential for more growth short to medium term

 

Personally once I buy an IP, I'm more interested in the return on debt ie rental/debt on property

 

Is extracting equity and buying again an option?

 

This will happen over time as values tend to rse faster than rents. You should periodically check whether you should seĺl and invest the proceeds in an investment with a higher return.

 

While i have capacity to purchase additional investments i would not sell current stock
But i pretty well only use Net Yields for deciding investment decisions.
Ps changing properties is financially very wasteful and should only be considered after careful calculations

 

Total annual rent / total debt = yield

Value increases are for equity grabs for deposit + costs for next purchase and that debt is calculated into the next purchase to determine yield.

Gross yield drops only when rent drops.

 

I calculate it based on value. Thats would you would do with shares.

 

Makes perfect sense to me.. Especially if you're thinking about lifestyle now and living off the yields..

As an example, If you had a fully owned property worth say 400k, returning say $300pw, it's definately a worthwhile option to look at redeploying that 400k into another property returning say $450+pw. Especially if you think the area has had its run in terms of CG..

Or as mentioned earlier, use 350k to purchase another better yeilding asset, and the 50k as deposit for another..

As long as the numbers stack up in regards to buying/selling costs and cgt, I'd be inclined to go for it.

 

I think you have to look at outgoings too, and CG probably. And return should be on current value if looking at whether it is worth changing to something else.

You can get 10% returns but the maintenance will eat into it & tenants may rip the place apart.

Without all the detail in full, is hard to say what would be better/best, but if they are 300-400k places, paid off and in demand, it would be hard to see where you would do better if buying other resi. At the same time sounds like you could buy more anyway.

 

thats why i love a good GFC, my yield goes up

 

I'd rather not have another GFC but the actual cash flow from the property is what's going to put food on the table, not unrealised value.