Don’t get fooled by the yields

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Don’t get fooled by the yields. 

Firstly, what is a yield? Well, the yield on an investment property is, basically, the percentage of return you get, as the income, on the property. Simply put, if you’re to get the yield, or the rent with the week, times that by 52 and then divide that by the purchase price. You would have your gross yield percentage. 

What does it mean, now, by don’t get fooled by the yield? Well, basically, for those who are looking to create cashflow from their investments, you go to your yield to figure out how much income you might earn. Now, beneath the yield there are expenses that translate that gross yield to a net yield. If you were to say, “What are some of those expenses?” Property management, strata, rates, water, landlord insurance, mowing lawns, there are a few different expenses, and then beneath that there’s the mortgage.

When I say, “Don’t get fooled by the yields.” The simplest way to put it is, just because a yield is very high, it doesn’t mean the income on the asset is high. A perfect example is townhouses and units. I personally invest in the townhouse where the yield look amazing, but then, as you go from the gross and get down to the net, it just isn’t the same.

If you’re looking at the yields and trying to figure out, “What is the amount of yield I need to cover my interest only mortgager payments or cover my principle and interest mortgager payments?” There’s a few things for you to consider. If you’re going on the 5%, and above, gross yields, you’ll start to see that you can cover these outgoings, as well as your interest earning mortgager payments. When you go from seven, or sometimes six and a half, but usually seven, and above, you can start to actually pay down your mortgage. 

Now, if you aren’t in a position to do either of these, it’s possibly because there are things hidden in your yield that you’re not quite sure are eating away the cashflow. That is, usually, what comes from your strata, or areas where insurance is higher, or where areas that rates are higher, and vice versa.

That’s what I wanted to share with you today. Don’t get fooled by the yields. There’s a deeper look that you need to complete in order to assess your gross, your yield, and your cashflow position. That’s it from us at Investorkit, the experts in wealth creation, helping you take action.