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Rental Yields

Discussion in 'Real Estate' started by talbashan, 13th Apr, 2006.

  1. talbashan

    talbashan Well-Known Member

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    Hi everyone,
    this is my question:
    If you buy a property for $300k and 7yrs down the track the property is valued at $600k, is the rental yield for this property calculated at the original price you purchased it at or at the new valuation price?
    I've heard people say that yields go down with hi growth periods as rent doesn't keep up with the growth, but in my opinion it should be the buying price that should be used as that is the money that you laid down for the investment, and the rent is a return on THAT invested money not a theoretical new value...
    where am i going wrong?
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    You are going wrong at the point where you place any emphasis on yields after you've purchased :D

    I personally don't feel that yields are important post-purchase, unless you want to compare your current rent to those being achieved with other similar properties nearby, in which case I would be considering the current bank valuation (assuming it is reasonable and comparable to other recent sales in the area).

    That's just my point of view though - others may place more importance on yield post-purchase.
     
  3. Nigel Ward

    Nigel Ward Team InvestEd

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    I agree with Sim'. I think it's largely irrelevant unless you're:

    1) trying to figure out if you're charging market rent or not
    2) trying to justify a higher valuation out of the bank by capitalising rent as a valuation methodology.

    Altho, it gives you a good feeling after a few years on ownership when your rental yield gets into the teens...:D

    Ps. in calculating your yield, you should include any reno costs to be more accurate.

    My 2.2 cents

    Cheers
    N.
     
  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I must admit that for my block of units, I do actually calculate value based on yield.

    I consider the yield that I see similar properties selling for in the region, and then use this and my current rent to calculate a value I tell the bank.

    Eg. total rent = $740pw, current sales yield for similar properties = 5%, thus my suggested valuation = $769,600

    Note that houses generally are not valued this way by the banks ... this is for a block of units.
     
  5. talbashan

    talbashan Well-Known Member

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    mmmm noted...
    the reason this came up is someone telling me that although he has properties in sydney, they don't give back the rental return because rent didn't keep up with growth. i thought that it was crazy as i would be more concerned about the growth (in order to access it) rathar than the rent, providing that the rent is paying some/all of my expenses.
    cheers
    tal
     
  6. TakeStock

    TakeStock Well-Known Member

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    I can only agree with the others. The yield is important at the time of purchase as it gives a means of comparison with other investments and additionally will allow you to work out the cashflow situation. The person you have been talking to is simply saying that there has been significant growth in his properties, however the rental income has not changed and therefore the yield, if calculated on the current property valuation, will be less. So what! What a great problem to have! Yield will decrease if either 1. the asset value increases or 2. the rent decreases. I know which one I would prefer!

    Decreasing yields are a problem however if you haven't already purchased. The properties are either increasing in price or rents are decreasing. Having said this, all of our rentals are slowly increasing. :)

    Exactly!

    Cheers
     
  7. -T-

    -T- Well-Known Member

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    As an aside, rents aren't a perfect function of value. Sure yield will go up and down based on value and rent (and costs), but interest rates and other external factors may affect yield much more than value. Then there's supply and demand... rent is a function of renter supply and demand, whereas value is (I guess) a function of owner occupier supply and demand. The investor ties the two together by considering yield (I think). If investors disregarded yield, I guess they would be two completely separate markets. Or am I way off? hehe :D
     
  8. D&K

    D&K Well-Known Member

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    T, I don't think you're way off at all. I wouldn't say they are entirely separate markets as there are common factors like the desirability to live in a certain place influencing both owners and renters, and if you can't buy you might rent or if rent is too high you might buy, but the link between them isn't solid.

    I find rental yeild is not really an indicator of capital growth, which is my primary reason for investing. Generally, cheaper properties (even within a suburb) have a better yield than expensive ones but this doesn't translate to the cheap properties having the best growth prospects; not in my experience at least.

    The other problem is that when comparing your yeild to a suburb/town's figure, yield compares two lag indicators on market activity: where prices have gone (based on the last six months or year) and where rent has gone. Is there any benefit from this? Maybe if your property manager has gone to sleep there is?

    Rental yields for towns/suburbs are also lag indicators because of delays waiting for rental review (eg, which in a suburb could include many 1 year rental agreements) and limits on how much rent can be increased, for example, rental increases on renewal might be limited to 5% through the contract/ state law even though a 10% increase might be possible if you returned to the open market for a tenant. Hence basing any decision on yield is working with past trends.

    For existing properties it is really a case of servicability for what you want to do, and that's a straight calculation of incoming versus outgoing, and what you need in order to add the next property, etc. The yield based on either the initial price or current valuation doesn't count for much unless you're comparing investments with an intent to sell, pay the CGT, and change.

    My 2c worth. :eek:
     
  9. TryHard

    TryHard Well-Known Member

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    One of the concepts Mr Navra covers that really hit home with me was the opportunity for capital growth through buying 25% above the low end of the market in an area of mainly owner occupiers.

    Our only IP (and another about to follow next door) are in such an area and the quality of tenant has been fantastic - in fact on last inspection they were looking after the place a damn sight better than we would ! We didn't even look at likely yield when we built it (did it to make sure we had privacy as we live next door :p).

    Possibly could have had 3 properties in Ipswich instead of this one at the time, but we only have to 'manage' one lot of reasonable yield tenants protecting our investment and growth prospects on some reasonable acreage, and we all seem to be happy so far. Very very low stress investment ...

    The yield is not so much a consideration, unless of course the returns were so bad that we need to chuck in more than what we perceive the growth to be, but at the moment its the complete package and low maintenance that appeals ....
     
  10. Tom&Don

    Tom&Don Active Member

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    I suspect the percentage of ratbag tenants is fairly constant accross the economic spectrum. Just because someone is financially better off doesnt mean that they arent slobs, have no regard for others property etc.

    On the topic of yields - I use them as a bargaining tool in negotiations (both with vendors and banks), and as a means of establishing a fair value in my mind.

    However, when it comes to making money i dont place much weight on the yield of the investment. I look at the leverage I can get, the value I can add, and how predictable the $$ stream is...

    Tom.
     
  11. Jacque

    Jacque Team InvestEd

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    And therein lies the importance of your SANF factor. No good tossing and turning worrying about your investments and watching your hair turn grey as a result!
    I suspect that this is the reason some investors favour newer properties as well. Less maintenance= generally less contact and hassles from PM= less stress.