At the end of the day the percentage yields are great but isn’t the dollars we are really wanting?

This story was spurred on by a recent percentage increase of investors talking to me who are chasing high percentage yield properties. Now please don’t think that I am against high percentage yielding properties. In fact I am all for it, as long as the investment property is in a relatively low risk location.

Where I find investors get a little confused is where they believe their high percentage yielding property or property they are looking to purchase will solve all their financial problems. Secondary to this, commercial investors and older investors calculate yield differently to current day residential investors. Somewhere along the way, set up costs have been relieved of their duties in being included in yield percentage calculations. For example:

$300,000 purchase price

$ 15,000 set up costs rounded up (stamp duty, searches and legal’s)

$340 per week rent received

Now in todays terms the yield in percentages here would be ($340 x 52 weeks)/ $300,000 = 5.89%

The real yield is different from this though, being ($340 x 52 weeks/ ($300,000 + $15,000) = 5.61%

And that’s a reasonable difference… more than a quarter of a percent. But let’s get back to the real topic of the Blog…

To use a recent example, a client spoke to me in relation to purchasing a property with a granny flat and was going to receive an impressive 8%+ yield. Now on the surface that looks fantastic but lets look at the “real” numbers here.

He was thinking of purchasing a property in Western Sydney for around $290,000 and with a granny flat of around $80,000

This enables the vendor to receive 2 lots of rent and therefore being able to increase the yield that the property will receive. Using the current calculations, to receive a 8% yield the rents on both properties would have to be $570 per week. Now on the surface that seems impressive but investors have been blindsided by the 8%.

Given you now are receiving two lost of rent on two different leases, you are now going to be charged two lots of:

• Leasing fees
• Postage and petties
• Management fees
• Ingoing inspections
• Outgoing inspections
• Annual statements

Now, sure you can negotiate with your managing agent to have some of these reduced or wiped, but the larger fees will remain. This will dramatically affect the real or net yield percentage that you receive and quite easily reduce your 10% down to 8% or below.

The funny part was their logic they tried to sell me on ( I suspect they were also sold this concept )… So Todd if I get 8% on my investment property and my interest on loan is 6% then I have a spare 2%

Factoring in all the usual fees plus 2 weeks per annum vacancy, then the net cash to you is around $39 per week plus depreciation benefits. Now depreciation is different for every property so lets be generous and say in total you receive $100 per week in your hand.

How long is it going to take to make a significant dint in the $420,000 home loan?

But lets please the critics and say you receive $200 per week back, again that’s only $10,400 per annum extra you MIGHT make as extra repayments on your home loan.

A second example of this are USA properties. They are sold on the fantastic yield percentages available to them currently. Now I like the idea of USA properties and the opportunities available overseas but like all investing, location is paramount…especially if you are investing in a foreign country.

I have seen percentages thrown around like 17% and higher. Breaking that down to a dollar figure on a purchase of $70,000 is $229 per week rent.

So by switching the percentage for a dollar figure, you can see that after interest that you may pay on a loan from equity here in other Australian property, this property will be only around $120 per week positive after the real estate takes out their management fees.

Add in to the mix that Australia is past parity currently and this figure is slightly less again. Not exactly enough to retire on unless you have a considerable portfolio of them. To achieve this you require substantial equity here in Australia.

For USA investors, the real money to be made is when our dollar goes back down to 70c. Not only will your yields and rental dollars skyrocket but so will the value of your property… on a percentage basis of course!!!

On a last example, I have a good friend here in Sydney who owns a portfolio of 6 investment properties in Northern WA (he doesn’t listen to my advice). Now due to an economic resources adjustment, the yield on his last purchase had a correction of 22%.