What yield - residential?

The commercial thread on low yields is very interesting.

The propertytwinsTM have outlined their strategy with a broad 7% target.

What do you target and why? When would you make an allowance, and what to?

We know that 5% yields can be cash-flow positive, whereas 8% yields might still be negative, but what ballpark to you use?

Personally, I haven't been particularly concerned (as all my PPORs have become IPS), but they are all sitting at above 5%, and in current conditions that's ok by me.

For my personal strategy, a cash flow (and capital growth limited) option would have to yield 7%+, whereas I'd still be happy with 5%, or even less if I thought it had good growth prospect/potential.

I'm also not particularly interested in yields at current market value, as in my view the purchase price and borrowings are fixed, and selling down minus the costs are not usually a (good) option (if better yields were thought achievable elsewhere).

I hope there are some dissenting views or comments to help those of us who are trying to refine our plans for 2016!

 

I'm interested in yields. I'm with you 7+%. By the time you factor in the rates, water, repairs etc etc etc my conservative calcs tell me to chase 7+ for cf+..... But depends on the area your chasing with rates, PM's fees etc varying from suburb to suburb

 

I'm a cashflow chaser generally. But if I'm looking at something that might be capital growth limited - I don't think I'd go for it unless it was yielding 10% plus. The opportunity cost is just too great otherwise I think.

 

As @thatbum alluded too, depends on the overall deal I think.

Would have to be 10+ if yield was the only thing going for it but my investing strategy doesn't allow this at the moment (phase 2 does).

I have some 7s, 8s and 9s myself but these are future renovation or development projects.

We have some WA & ACT stock at 5-6% too which is CG potential.

Wouldn't really go under that. I see yields a bit like the PE ratio on shares where if the number is outside normal bounds then something is probably off.

 

First 4-5 purchases were either previous PPORs or inner-middle ring city houses in Brisbane. In the mid-late 90s a typical BCC house might have returned 6.0-6.5%+ yet by 2008 they were returning 4-4.5% with IRs much higher than now. An argument could be made that the low yields where a sign that market values were stretched particularly when SVRs were near 9%.
I've purchased places as low as 4.4% yield and as high as 8.3%. I wouldn't pick places based on this though as there is usually a catch as the market determines prices for reason. There are windows when locations are under or over valued, the yield vs historical yield often reflects this.
It is hard to just keep purchasing places with 4% yields unless they are new builds.
I'm willing to be flexible but now prefer places with better cashflow.
If I had to put a number on it at current SVRs:
Logan 7%+
BCC LGA 4.8-5%+ or Sydney/ Melbourne equivalent.
Regional Qld/NSW Major Centres 6%+
Regional Qld/ NSW smaller Centres >40,000 population 7%+
Adelaide- Salisbury LGA 6%+
- Playford 7.5%+
- Outer Southern suburbs 5.5-6%
Then again if I found a great opportunity I would happily disregard the above... occasionally.

 

Are people listing net or gross yield?

 

Thanks Hugh!

 

I'd accept a lower yield if it has
1. Development potential
2. Possibility of zoning change
3. CG potential.
4. Newer builds

But right now need the next one to be higher yielding to balance everything out.
Mine are currently 5 and below.

 

@HUGH72 @Adele : you both mentioned newer builds, and I asked elsewhere about depreciation ballparks - how do you factor this in?

 

Simple question, difficult for me to explain+ I might be wrong.

The depreciation was just to reduce our taxable income without actually 'spending'. It's not money in your pocket (cashflow) nor is it an expense (actual money you paid). And as it is a value that is 'deducted' from your original purchase price, you will have to pay for it at the end (when you sell). Did a rough depreciation on the calculators online and was fairly accurate. First year depreciation value for me is $13K

Again please correct me if I'm wrong.

 

I haven't calulated it's exact impact and I'm not an accountant but.. Using an online calculator a 2004 new build (last new build for me) of low/medium quality of finish purchased in 2015 might have 8-11,000 in the first year of depreciation to be claimed.
Very roughly depending on purchase price and assuming top Marginal tax rate its equivalent to an improvement in return of 1.3% at least?
I sure someone else who is qualified in this area could provide better figures.

 

Residential is almost always quoted as gross. Net would prob be negative or zero in a lot of cases?

 

Thanks, @D.T.

 

My development sites prior to development range from negative yield (ie site is vacant land or untenantable) to 3%
After development is ranges from 6-9% gross (not including depreciation)

 

Gross yield.

 

[QUOT"Bran, post: 128444, member: 496"]

What do you target and why? When would you make an allowance, and what to?


I target any deal where there is a good chance to manufacture a good-great amount of equity in a good time frame for me. I am happy to accept 3-4% yields short term and put the 'losses' down as a business expense of the deal. This is inline with my own goals.