Crunching the yield numbers
Question from Scott Wetherall updated on 16th April 2014:
I'm wanting to purchase my first investment property (residential), so I'm trying to understand number crunching. Should I be concerned with gross yield or net yield?
Our expert Ron Hoy Fong responded:
Hi Scott, getting a good gross yield in a cashflow area is very important but buying for capital growth is even more important than getting high yields during the boom period that we are currently in. If you are looking at say capital growth properties in a downtown area of a larger city, capital growth would generally outstrip gain from cashflow properties. If buying cashflow properties where capital growth is slower then I would expect higher gross yields in return. Rule of thumb would be to try a get a gross yield about 1% to 1.5% gross yield above a two year fixed interest rate in capital crowth areas so that it covers the costs like rates, insurance, water, vacancies and lawns. For the cashflow areas I would try to target a minimum of 3% to 5% above the two year lending rate so as to compensate for lower capital growth gains. These properties on average have a higher maintenance cost caused by tenants. I like to use the two year lending rate because if I was to fix a loan for that period I know I can review rent four times at six monthly intervals.
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