Yield calculations

I am working through calculations to help me move forward with my strategy and wondering how to calculate yield moving forward.

For top level calculations do assume yield will remain relative to property value over the years or do you apply a percentage increase to the rent per year, independent of property value?

Also what percentage do you calculate maintenance on?

The type of property we are currently considering is ~$300k houses in outer suburbs from capital cities with initial yield of 5.0-5.5%

Thanks,

 

Rental growth does not have much link to capital growth - so I wouldn't be using a "yield" calculation as such.

Depends what you're trying to do.

There was also another thread recently about the expense costs as a percentage of gross rent - I think figures ranged from 10% to like 40% generally depending on things like strata and such.

 

Thanks, so would you apply a say 3% increase(as a long term average) to rent per year?

I am trying to work out, over the long term, how much rent investment properties will bring in versus cost of holding.

 

I always calculate it as 52*WeeklyRent/PurchasePrice.

That way I ensure that I compare apples with apples.
I know that the yield is higher if I do it on loan amount and it's lower if I do it on total costs or reduce the number of weeks, but I find this the most meaningful.

If I forecast, I usually apply an assumed CPI on rents, so around about 2% pa in the current financial climate.

 

What about the costs of holding them long term compared to the potential capital growth gains?

Don't forget to let CG weigh in. No real use having properties where long term the rental income marginally exceeds the cost however little to no CG to show for it.

 

Yes capital gain is a separate issue right now, I am in early stages of developing a plan/strategy. CG will for sure be important, and my purchases will reflect that. For now though I am building a spreadsheet to show how purchasing IPs will effect our personal cash flow and future income. Therefore accurately forecasting rental increase is quite important.

Spludgey, thanks 2% seems very conservative but might run with that for now and do a bit more research on past performance.

 

Given I don't know what area but being that you are looking in outter suburbs in the 300k price range I wouldn't think 2% is being very conservative. As there is a lot of stock that would be built during the year that would hinder increasing rents as there is more supply.

I think 2% is on the money for this and 3% is optimistic, have a read of the PM forum there where rents are dropping by $20 pw.

 

You're probably right, but for me, if an IP doesn't work with conservative assumptions, it doesn't work at all.

 

Does anyone know a good calculator online I can use to calculate yield etc?

 

As Spludgley mentioned the calculation is fairly basic so no need for a online calculator.

The maths are weekly rent x 52 / purchase price.

 

Rents are generally related to CPI and wages, both are pesently low so a figure of 2% is probably realistic. A greater rise would be a bonus.

 

That is the correct standard yield calculation.

 

Anyone calculate yeild @ 50 weeks rent per annum.
To build a vacancy buffer for things like change of lease?

 

Everyone seems to calculate it slightly differently so there is no golden rule. But as @spludgey says it is about consistency and ensuring comparisons between apples and not apples and oranges. If you use one method and come out with 5% but use another for the same property that gives 4.5%, at the end of the day, the property is still worth the same to you.

 

Have you looked at the spreadsheets etc. that @Rixter provides free of charge? Very useful, I also purchased his eBook but yet to find the time to read it.

 

Perfect Freud.

 

@Rixter could you please share said spreadsheet with me. Thanks.

 

@Caltan, here's one of my tools I've been using over the past 17 years to build our Multi-$Million Property Portfolio spread around Australia.

I hope you gain great benefit - it, along with rest of my tools in the series, have certainly been good servants of mine, and have all played their roles in allowing me to retire early and exit the rat race a couple years back.

I'm not asking anything in return, other than what you learn from me, please pass onto others so they too can also benefit.

There is plenty of opportunity for wealth to be made out there, for all of us to share round.

Enjoy.

 

Thank you, much appreciated. I'll run through it tonight.