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Yield question

Discussion in 'General Property Chat' started by JetstreamVic, 29th Dec, 2015.

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  1. JetstreamVic

    JetstreamVic Active Member

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    kind folks of Pc.

    If you could purchase a place, with a long term tenant which has a yield of 6%, assuming that yield is rental income/cost of house, that was also cf +.

    Would that seem like a good deal?


    For what it's worth, I don't think there will be massive amounts of cg in the area, so the purchase would purely be on yield and cf+

    Thanks :)
     
  2. MsAli

    MsAli Well-Known Member Premium Member

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    Hi @JetstreamVic - need more info, however 6% yield + little capital growth doesn't sound like a great deal.

    When I started, I didn't know how capital growth looked like and went purely for 7% plus return. Capital growth happened as part of the normal cycle. Looking back, sure yield is important, however it's the capital growth that will help you move forward with your portfolio & the financial goals. There is little use for buying just for yield if there is little prospect for capital growth (though what makes you determine this will be the case?).

    Looking at your cashflows, what's your bottom line? How much CF+ is the property? I suspect at 6% it won't be too positive, unless of course you are using depreciation benefits to consider the +ve cashflow.

    So would you rather have a few hundred in cashflow positive or a few hundred thousand in capital growth?
     
    Last edited: 29th Dec, 2015
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  3. dabbler

    dabbler Well-Known Member

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    6% wont be positive most likely & the thing is in some places it is hard to know where/when the CG will come, one area I watch just had an unexpected large spurt, I was only expecting 2% / year, indeed it may end up the long term average if it goes sideways now for years.

    So, depends really on your plan and what you want, also without knowing location it is a real stab in the dark to say yay/nay .
     
  4. Summersky

    Summersky Member

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    I have a question that somewhat relates to JetstreamVic's opening question - CF is easy to calculate when searching for a property. However CG, to me, seems mysterious. Can you tell me your method of determining whether an area has CG potential? I'm not a fan of listening to 'property professionals' opinions because I feel that either it's too late once their advice has made it to print, or they have an agenda of their own. Obviously I can't prove this, this is just my perception.
     
  5. MsAli

    MsAli Well-Known Member Premium Member

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    Hi @Summersky - there is no way to project how capital growth will play out in the future as often booms are driven by human psychology / emotions. You can however look at:
    1. Historical growth charts on Price Finder / RP Data / Residex. You can see what the prices were at different peaks and consider when the markets play catch up again where the prices may be at the next peak. In Western Sydney, at the current peak, I note that prices have grown 80%-100% from the previous peak in year 2003/2004
    2. Growing population - are people attracted to the area?
    3. Infrastructure investment in the area - any roads being constructed? new / improved train stations and train lines?
    4. Private investment/spending - is there gentrification happening? Are there people demolishing old homes and building new homes / duplexes / townhouses / units?
    5. Government investment/spending - any universities? hospitals etc?
    6. Industries supporting jobs in the region - any ALDI's / Costco's / Woolies showing up in the area? These guys have done their research so leverage off their presence - it usually means something
    Another key is to look at the value in the suburbs and the value in the surrounding suburbs. Are any under valued? Could it mean that buyers when priced out of suburb X are more likely to spend big in suburb Y.

    Last boom when the rental returns / yield was circal 7-9% in Western Sydney and low rate environment, the masses were obviously attracted to the returns - who wouldn't be? Therefore the prices increased, the rental yield on the new value decreased. It went down to the low 4%'s...That's when you know the capital growth has happened, as the return no longer looks as good.

    Hope this is clear?
     
    Last edited: 29th Dec, 2015
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  6. monalisa

    monalisa Well-Known Member Premium Member

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    @Summersky

    Look for well located properties. Are these located close to shops, transport etc? Those which are conveniently located are more likely to attract buyers as well as tenants and therefore have more demand, vs those that are situated middle of no where / suburbia.

    Look for properties with an upside (e.g. uniqueness factor or potential), rather than buying for the sake of it.
     
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  7. Tim & Chrissy

    Tim & Chrissy Well-Known Member

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    Great summary!

    These are the signs I was looking for in the area for my next IP. My only concern is that the growth from the new railway stations in North Brisbane may have already happened. Stations are due to open mid to late 2016.
     
  8. MsAli

    MsAli Well-Known Member Premium Member

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    What's the current return? If you can get 5-5.5% around there, I understand it's good enough given those have been desired by owner occupiers more so to begin with.
     
    Last edited by a moderator: 4th Nov, 2016
  9. Tim & Chrissy

    Tim & Chrissy Well-Known Member

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    They are hard to come by and sell quickly but I have seen 6.5 - 7% on townhouses dependant on strata fees. 6% on houses with associated units but the downside is you can only lease the associated unit to a family member of the main residence.

    I'm still tossing up between townhouse and house, I need a high rent yield to keep serviceability up.
     
  10. MsAli

    MsAli Well-Known Member Premium Member

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    For North Brisbane, that sounds pretty good. Though you do pay a premium for something with an additional unit. And in North Brissy, dual living is not as popular as the demographics is better and is able to afford better quality. If you get 5.5% on a house that is decent, it may work. May be worth getting a BA on your side?
     
    Last edited by a moderator: 4th Nov, 2016
  11. Tim & Chrissy

    Tim & Chrissy Well-Known Member

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    I had toyed with the idea with a buyer's agent previously. Just over a year ago I visited one with a substantial upfront fee but not enough info on the quality of IP's they would present.

    I'd be happy to pay a buyers agent who can do better than what I've already found.
     
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  12. JetstreamVic

    JetstreamVic Active Member

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    Just to highlight some good and bad parts.

    The place that I am looking at has dropped about 20k since it was last sold a couple of years ago. Which is why I am thinking that CG neutral

    By CF +, it would be to about the tune of $100 per week (On a basic, rent - interest on loan calculation)

    Having said that, its in the crappy area, right next to the good area (which could be a CG growth in the future)
    Close to primary school
    600m2 block - so future development opportunity STCA
     
  13. The Y-man

    The Y-man Moderator Staff Member

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    What about other costs? Repair, maintenance, vacancies?


    The Y-man
     
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