澳洲Australia property Property Price and Investment Yield | Syd


在澳大利亚 The pool at of an IP needs to be resurfaced (or so the pool doctor says), the cost was estimated to be $10K ($10,000), after recoverying from my impresssion of a cat coughing up a fur ball, it just seems far too much. Its just a standard poo I need some advice regarding a property purchase. Property - semi-detached house Bedrooms - 2 Condition - average needs internal reno to modernise Street - one of the best in suburb Location - excellent Close to schools - yes Transport - 50m


Hi,

Long time reader here, and have finally decided to take the dive into IP's.

When purchasing an IP, should the price of the property be estimated from the rent it yields? For instance, if the place is returning $1650/month, should I be using that figure to calculate what I should be paying for the property?

This is a very inner city property, so I do realise yield will be less, but I am looking at future capital gains.

Kevin  

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So, what if you use 5% to calculate the price, and the offer is rejected? What do you do then?  

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Well I guess the underlying question is what sort of % yield should be expected in inner Melbourne areas these days?  

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And my question is, are you looking for the implied yield at which properties are actually changing hands, or are you saying 'if the yield is below a certain % I won't buy'? If you're just calculating implied market yield to calculate market price, why not just look at recent sales and base your asking price off that?  

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alexlee said: ↑
And my question is, are you looking for the implied yield at which properties are actually changing hands, or are you saying 'if the yield is below a certain % I won't buy'? If you're just calculating implied market yield to calculate market price, why not just look at recent sales and base your asking price off that?Click to expand...
Because there's been few in that particular location and the last one I believe was sold much higher than what it should have been. I don't want to overspend to find out I can only gain minimal yield.  

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Invstr said: ↑
Because there's been few in that particular location and the last one I believe was sold much higher than what it should have been. I don't want to overspend to find out I can only gain minimal yield.Click to expand...
Well, clearly someone disagreed with you. Possibly an owner occupier who doesn't care about yield? What does 'should have been' mean in this case?

If you're looking for a decent yield (but you also say you're after CG), why look in the inner city? If you're focusing only on one specific area, you don't get to choose the yield. The market chooses for you. As for properties selling for more than you think they should have sold for.... that's your opinion against another buyer's. If you offer less than what others offer, you won't get the property. If you must buy in a particular area, your opinion of price doesn't matter if other people think it's worth more.  

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I do realise what you are saying and you're telling what I already know and it's a bit common sense too - the market dictates the price. The reason I'm looking in this area is *in my opinion*, there will be above average capital gains in the future. I just want to ensure yield is reasonable - not better than average, but not too low either.  

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Invstr said: ↑
I do realise what you are saying and you're telling what I already know and it's a bit common sense too - the market dictates the price. The reason I'm looking in this area is *in my opinion*, there will be above average capital gains in the future. I just want to ensure yield is reasonable - not better than average, but not too low either.Click to expand...
If you think this area will have good capital gains, that's fine. But my point is that yield is determined by the market. You're asking 'how much should the yield be', which I think is the wrong question if you've already decided on the area.

Look at the market price and rent, and calculate the yield. Then ask yourself whether the yield is acceptable to you. What's too low? If it's too low, what do you do then?

If you insist on a particular area, you don't get to ensure that yield is reasonable, unless you are willing to walk away.  

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alexlee said: ↑
If you think this area will have good capital gains, that's fine. But my point is that yield is determined by the market. You're asking 'how much should the yield be', which I think is the wrong question if you've already decided on the area.

Look at the market price and rent, and calculate the yield. Then ask yourself whether the yield is acceptable to you. What's too low? If it's too low, what do you do then?

If you insist on a particular area, you don't get to ensure that yield is reasonable, unless you are willing to walk away.Click to expand...
If it's way too low, I'll do my sums and probably walk away. However, it's hard to know what is considered low. I know ~5% yield was the norm a few years back, but what is it now (as per my original question).  

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InvestSmart shows average yield per suburb (split into houses and units) for free on their website... Maybe you check that out?

Regards,

Jason  

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jrc77 said: ↑
InvestSmart shows average yield per suburb (split into houses and units) for free on their website... Maybe you check that out?

Regards,

JasonClick to expand...
Yes, great. Just what I was looking for. Thanks  

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Invstr said: ↑
If it's way too low, I'll do my sums and probably walk away. However, it's hard to know what is considered low. I know ~5% yield was the norm a few years back, but what is it now (as per my original question).Click to expand...
Everyone's idea of a good yield is different.

Mine is; anything less than the interest rates of the day is bad.

Why? because at the start of our investing journey we had - at best - average incomes, so the yields had to be good.

This pretty much excluded us out of anything in Cities.

But it hasn't mattered in the longer term; we have been able to keep buying cheaper properties with good yields, and still enjoy good growth - even though they weren't inner city.  

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Invstr said: ↑
should I be using that figure to calculate what I should be paying for the property?Click to expand...
Yes, but it's not straightforward.

Over the long term the total returns from real estate are around 10% p.a. (capital gains + rental yield).

So if the rental yield is say 4%, then expected capital gains are around 6%.

However, in the short term if there was a lot of demand for real estate and this pushed rental yields to say 2%, then rather than future capital gains being around 8%, it's more likely to be 4% or so. (This relativity should roughly apply to suburbs/rings over the long term, but in the short term, there might be more demand for a particular suburb/ring vs another).

This applies for the market and generally at the suburb level over the long term. Obviously there will be differences for individual properties in the short term on a case by case basis.  

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It's worth noting also that %yield is often lower on more expensive properties within the same suburb. Also what if the rent was below market for that house? You might be making a lowball offer without knowing it.

Why dont you start by interviewing some PMs in advance. While you're at it ask a friendly one to do a Comparative Market Analysis (CMA). They'll find you recent sale prices on three similar properties (you might have to make adjustments for slight differences). Thats how your valuer will do it. Then make an offer below that.  

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.toe said: ↑
It's worth noting also that %yield is often lower on more expensive propertiesClick to expand...

In my experience this is only true up to a certain point. I don't believe the graph would be linear. I reckon it's more U shaped. As the price increase, sure, the yield goes down.....but once you start getting into rarified territory, it actually swings back and exceeds the initial yield.


Example ;


300K.............7%

600K.............5%

900K.............3%

1.2m.............3%

2m................5%

5m...............8%

10m..............10%

30m..............12%


I guess .toe you were only refering to the first 3 lines or so. Fair enough. Just wanted to point out the shape of the curve is a U, not a straight line heading south.  

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Dazz said: ↑
In my experience this is only true up to a certain point. I don't believe the graph would be linear. I reckon it's more U shaped. As the price increase, sure, the yield goes down.....but once you start getting into rarified territory, it actually swings back and exceeds the initial yield.


Example ;


300K.............7%

600K.............5%

900K.............3%

1.2m.............3%

2m................5%

5m...............8%

10m..............10%

30m..............12%


I guess .toe you were only refering to the first 3 lines or so. Fair enough. Just wanted to point out the shape of the curve is a U, not a straight line heading south.Click to expand...
Dazz you are quite right, my bad :eek:. I was assuming Invstr wouldn't spend 5Mil, but then how would I know? :D  

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Yield and gain

The idea that capital gain increases as yield decreases is a myth perpetuated by real estate agents and any one that wants to sell you a high priced property. The reality is much more complicated than that.

First if the property has a low yield that means that the price has ALREADY increased relative to other properties. It does not mean that it will continue to increase in the future.

Also if the yield is low that is probably because it is in a "good area" and people really want to own a property there. This means that the rents MAY be more likely to increase relative to other areas. But it depends on how much better the area really is than other areas and how much more the rent is than other areas. It's the limit of supply and demand. As the rents and property prices increase there is a limit to how much people will and can pay before they just decide to go for a cheaper area.

This is why it is VERY dangerous to buy a property in a good area and hope that it will go up more than properties is average areas.

Let's take a specific example. Bondi beach in Sydney, good area vs say the average Sydney suburb. If Bondi beach prices are only 20% more than the average suburb but you think the area is much more than 20% better then perhaps the prices in Bondi will continue to increase faster and therefore you get a higher capital gain in this area. But if prices are already 500% higher in Bondi, then you might buy a house in this area thinking that the capital gain will be high, but in actual fact discover that the prices do not go up as much as that of other areas.

Another example: a number of years ago you could buy properties in the outer suburbs of Brisbane with very high rental yields, but people would say "oh they are low capital growth areas because it's not a good location"

Actually it was a VERY good place to buy because the prices very quickly doubled and the yields came down.

this is an example of where the past does NOT equal the future. The past of some areas is low capital growth. This does NOT mean that the future is low capital growth, it depends on more factors, in this case as the city expanded these areas became more desirable to live in and the supply vs demand caused an increase in price.

So I would actually argue that if you have a property with HIGH yield it's more likely to ALSO have high capital growth. And if you have a property with LOW yield is also more likely to have low capital growth, although there are many exceptions.  

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internext said: ↑
The idea that capital gain increases as yield decreases is a myth...Click to expand...
Let's look at that assertion with an example. Say there are two areas, A, providing a 10% rental yield and B, providing a 5% rental yield. If both had expected capital gains of 5%, which one do you think buyers would target?

The arbitrage actions of buyers support this relationship over the long term. Obviously things can get out of whack in the short term. Also, it's hard to be precise with real estate because each one is so different.

For example, in some of the US cities with declining population, you could probably get a rental yield multiples times what you get in the US cities with growing populations. Do you think you could expect the same capital gains?  

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High yields means there were more rent rises than capital gains in the past. Low yields means there were less rent rises than capital gains in the past.

Both yield and capital gains are directly indicative of what happened in the past, you cant assume they are indicative of the future.

However, having said that it is also true that real estate markets do not tend to revert to mean growth on a quarterly basis (unlike shares). Instead they tend to continue whatever they were doing last quarter.

You have to be careful how to interpret this, its like a casino where the results are random but lopsided, there is a bias that becomes evident over time. Shares tend to revert to mean growth, property tends to continue any new growth trend.

So I would have guessed the best bet was to buy in high yield areas with a new high growth trend. Especially if there are fundamental reasons to believe in a change of fortune for the location.  

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