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Rental yield and future serviceability

Discussion in 'Property Finance' started by Creamy, 16th Oct, 2016.

  1. Creamy

    Creamy Active Member

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    I know everyone has a different strategy, but is there a gross rental yield percentage cutoff before you pass on a property? 7% seems to be the number to aim for, however 7% can be quite difficult to come by in the area I'm looking in.

    In the interest of future serviceability, if the rental yield percentage is quite low (<5%) for the current property, does that mean the next property will need to make up any shortfalls in yield? And thus the strategy isn't a pure cash flow or growth one, but an alternating one between the two to meet serviceability/lifestyle requirements?
     
  2. wombat777

    wombat777 Well-Known Member Premium Member

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    You can use depreciation to help counter a lower yield. A recently renovated property can attract fairly healthy depreciation which helps boost cashflow. I'm wondering if tax returns and low doc lenders might help or take this into account in the long run? ( or am I wrong on this )

    Both of my IPs were extensively renovated prior to my purchase.
     
  3. Colin Rice

    Colin Rice Mortgage Broker Australia Wide Business Member

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    Serviceability is not possible to determine without the hard facts such as gross income with a base and overtime/allowances at 80% in most cases or 2 years financials for self employed. Would also need to know current debts such as CC limits, mortgages, personal loans, car loans. HECS debt etc.

    The higher the yield the better it will improve serviceability but usually higher yeild is found at the cheaper end of the spectrum so the extra income probably wont improve serviceability as much as you hopeld

    Get a broker to run some numbers to let you know whats feasible.
     
    Last edited: 16th Oct, 2016
  4. BenWa

    BenWa Member

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    Hi Colin - how come high yield from cheaper properties doesn't improve servicability?
     
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  5. Colin Rice

    Colin Rice Mortgage Broker Australia Wide Business Member

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    I cant see where I said that @BenWa

    I said this though :)

     
  6. BenWa

    BenWa Member

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    Thanks - ah so I gather you mean simply that the extra income from the high yield won't be as useful as hoped simply because it won't be that high (because the property will be cheaper). So the solution is to buy lots of cheap high yielding properties to improve servicability :p
     
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  7. Colin Rice

    Colin Rice Mortgage Broker Australia Wide Business Member

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    Depends on what the "unknown metrics" are so maybe. Also what it is you want to achieve?
     
  8. BenWa

    BenWa Member

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    What are the possible unknown metrics?
     
  9. Colin Rice

    Colin Rice Mortgage Broker Australia Wide Business Member

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    In a nutshell, money in V money out and whats left to service debt.
     
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  10. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    Also, banks only use 80%of rental income at most, and many cap it at 6% even if the yield is higher so if you want to increase servicing you're best off increasing your PAYG.