Our Portfolio

How ‘four different yields’ help this investor gauge his progress

By Bianca Dabu
Money

The recent changes in the regulation of interest rates have affected several property investors and their strategies for wealth creation—and while many are still in the process of reassessing their journey, buyer’s agent Steve Waters reminds everyone that at the end of the day, a good property portfolio is simply all about “controllable cash flow.”

In today’s marketplace, following the recent Australian Prudential Regulation Authority (APRA) changes, it would cost an investor more to hold money.

“If you're paying your debt at an extra per cent above what you're paying right now… it's probably going to remove that nice little buffer [you] have there pretty quickly,” Smart Property Investment’s Phil Tarrant said.

According to Steve, many property investors’ worries stem from the fact that they got used to very cheap money, which put them in a compromising position in terms of controlling their assets.

“If you go back to the [Global Financial Crisis]... not many people lost their portfolios or their assets for lack of equity—it was from a lack of cash flow,” he said.

“We don't particularly mean it's got to be positive cash flow. That's awesome if it is, but not sacrificing growth at the same time. It's more about controllable cash flow.

In this scenario, the barometer or the benchmark that property investors talk about is yield.”

Phil and Steve talks about the four different yields that they use to determine the status of Phil’s property portfolio, as well as the next best step to take in order to continue making the most out of their acquired assets: 

How do you define book rental yield?

Phil Tarrant: Book rental yield … is the yield against the purchase price… which is the standard way to look at it. What you do [is] you work out what your rent is, you [multiply] it by 52, then you divide it by how much did you buy your property for or your portfolio for.

Our number is 7.3 per cent. That's pretty good.

The issue I have with that is that it doesn't account for a whole bunch of other stuff to establish these properties, so you're not talking about buyer's agency fees if you use them, you're not talking about stamp duty, you're not talking about conveyancing costs.

What about net rental yield?

Phil Tarrant: Net Rental Yield… [has] the same calculation: Your rent times 52… divided by the total establishment costs for these things—the purchase price plus the other stuff.

Our number there is 6.6 per cent. That's more of a realistic take on where our portfolio is.

Why is it important to be discerning about these types of yield?

Steve Waters: I think it's important that you do that because they are a cost. It's not something that you're making up, and most people don't know what their true position is unless you throw everything into the pot, which is clearly what you've done.

What is the market yield?

Phil Tarrant: Our total rent over our current valuation… This number's a lot lower. It's 4 per cent. That's on the basis of what are these properties worth today.

Steve Waters: This is something that a commercial investor would look at and take into account.

What is debt yield and how does it affect one’s portfolio?

Phil Tarrant: The other indicator here, I call it a debt yield, which is against the size of the mortgage.

Steve Waters: For me, that's the big one, because, at the end of the day, my debt's my biggest expense, and if it's costing me 5 per cent but my gross yield is 7 [per cent] … that's not a bad spread to take care of everything else. I know all the commercial guys and other investors and, perhaps, even accountants would be on going, "That's not the way to look at it," but for me, it is, because I might have controlled the property for 15 years and the debt's stayed the same.

Phil Tarrant: [When it stays] the same … that number's going to be really big, but then if you have a little cash cow that you keep milking and you keep going back and drawing equity out to 80 per cent, it's probably going to be a lot higher there.

Steve Waters: Or, on the other side of the coin, if I've had a property for 20 years that I bought for $100,000, it's now worth half a million and the rent's $350 a week—my value to income percentage isn't going to be that attractive.

Do you encourage property investors to follow this strategy?

Phil Tarrant: These are just some of the ways… that we look at our portfolio, [but] you know what, they're just numbers… [It always comes back to] what's in my pocket? Is it hurting and am I worried about it? Am I sleeping well at night and I'm not too concerned at the moment even though we're in an environment where things are changing quite quickly? I'm satisfied with our serviceability and we can weather any increases in interest rates.

Steve Waters: You got the buffers parked aside. You got the risk mitigation. Once again, we're creating these different metrics, and that's only because we like to do so.

There are a lot of people out there … that are just doing it on the standard purchase price, and I think that's short changing themselves or cheating themselves.

Tune in to Phil Tarrant’s portfolio update on The Smart Property Investment Show to know more about his acquisition costs, “boring” assets, risk mitigation, cash flow management and yearly income, as well as the inside scoop on a new property that could take the team’s investment strategy to the next level.

 

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  ["title"]=>
  string(72) "Mortgages in a tighter lending economy and why Brisbane is a good option"
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  ["introtext"]=>
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Tune in to the latest episode of Property Showcase, the podcast with the inside track on the products and businesses that will help turbocharge your portfolio, maximise returns and make your overall investment experience seamless and stress-free!

" ["fulltext"]=> string(818) "

To hear more about these services, make sure to tune in to this episode of Property Showcase!

 Make sure you never miss an episode by subscribing to us now on iTunes!

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Son Pham is the accredited Head of Mortgages at Rethink Financing\/Rethink Investing. He has over 6 years\u2019 experience writing loans, over 12 years in the wealth management industry working for the likes of CBA, AMP and private practice and he is also a licenced financial planner (AFSL 326450). He has multiple investment properties that are cash flow positive which help pay his mortgage on his home and fund his lifestyle.<\/p>\r\n

Son is able to write all types of residential and commercial property loans.<\/p>\r\n

In this episode of Property Showcase, head of mortgages at Rethink investing Son Pham joins host Tim Neary to unpack how an investor should approach getting a mortgage in place with banks tightening down on serviceability.<\/p>\r\n

Hear from\u00a0Son\u00a0about:\u00a0<\/p>\r\n

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  • The pitfalls that he has seen people get into<\/li>\r\n
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    In this episode of Property Showcase, director of investment services for Open Corp Michael Beresford,\u00a0joins\u00a0editor of Real Estate, Tim Neary to share why he disagrees that the cooling market means that the best times are behind us.<\/p>\r\n

    In this episode, hear from\u00a0Michael\u00a0about:\u00a0<\/p>\r\n

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    • Why Brisbane is a good investment option right now<\/li>\r\n
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Mortgages in a tighter lending economy and why Brisbane is a good option
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Will Magee has had ambitions to enter into the Australian property market for quite some time, but it has been more than just finances holding him back.  Having been granted permanent residency just two weeks ago, Will is wasting no time and is now in the process of signing papers and finding his first investment property.

" ["fulltext"]=> string(2483) "

In this episode of the Smart Property Investment Show, Will joins host Phil Tarrant to share why he is purchasing his first property in partnership with his brother, discuss the complications that can arise from such a strategy, and unpack the ongoing plan for building a joint property portfolio with his brother.

Will will also share how they approached saving for their first property, why he is taking out the mortgage in his name exclusively, and share their savings plan for the year ahead.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

RELATED AREAS OF INTEREST:

From property in Australia to a ski lodge in Japan
Mortgage Trusts, an alternative first step for property investors
Should a real estate title be in one person’s name only?

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A property investment plan years in the making
object(stdClass)#1184 (52) {
  ["id"]=>
  string(5) "18287"
  ["title"]=>
  string(75) "Regional Victoria showing up Melbourne in price performance, new data finds"
  ["alias"]=>
  string(74) "regional-victoria-showing-up-melbourne-in-price-performance-new-data-finds"
  ["introtext"]=>
  string(139) "

Median house prices in regional Victoria outperformed that of Melbourne in the June quarter, the latest REIV figures reveal. 

" ["fulltext"]=> string(2323) "

Median house prices in the regions rose 4.0 per cent to $419,500 but in Melbourne they dipped by 0.6 of a percentage point to $840,000.

The result in Melbourne was due to a 0.8 of a percentage point fall in prices achieved at auction; this was despite a lift of 2.3 per cent in private sales.

Inner Melbourne suffered due to auction prices, where median prices fell by 4.9 per cent to $1,459,000 but it was middle Melbourne that was hardest hit, with a 5.4 per cent drop to $974,500.

Outer Melbourne had a good quarter with the median rising by 0.5 of a percentage point to $681,000.

Apartment prices in regional Victoria grew by 3.7 per cent to $304,500 while the metro media was up by 0.5 of a percentage point to $604,000.

REIV President Richard Simpson said that despite fewer sales, many sectors of the market were performing well.

“2017 was a bumper year and while the trendline has flattened, despite the fall in median house prices in the June quarter, median prices are still up this calendar year for both houses and units, in Melbourne and in the regions,” Mr Simpson said. 

In particular there was been strong growth in regional centres which is probably due to the first-home buyers’ concessions said Mr Simpsons.

“The first-home buyers’ concession has been a boon for regional areas. A new entrant to the property market buying a house at the regional median will pay no stamp duty, while a first home buyer of an apartment in Melbourne at the median price would pay stamp duty of nearly $25,000,” he said.

Mr Simpson said that more prospective buyers are looking towards regional Victoria which is also having an effect in Melbourne.

“Melbourne’s outer perimeter continues to grow. Small increases in the June quarter mean that the median prices for both houses and units have risen over 10.5 per cent from a year ago.

Mr Simpson said moving forward that vendors need more realistic expectations as the highs of 2017 are now over.

“Negative chatter about the future of the sector coupled with stronger lending controls by financial institutions has created some uncertainty and vendors need to be realistic with their price expectations,” Mr Simpson said.

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Regional Victoria showing up Melbourne in price performance, new data finds

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