The one simple truth of Property Yield vs Growth – Property Rant 020

It’s the age-old competition to know which is better Property Yields or Capital Growth, Cash flow or Capital as I say. In fact, many property salespeople would have you think they are different sides of the coin and opposed to each other. The one simple truth about both is covered in this video.

NOTE – For beginners, Gross Yield is simple the Annual Rent / Purchase Price x 100 expressed as a percentage. The debate comes when we consider Net Yield and what it includes, as this can give a wildly different outcome with most sales companies preferring a Net Yield before any finance is taken into account. Realistically, by definition, it is ‘after ALL expenses’ the fact that many expenses are variable is the cause for concern.

Video Transcription

Hey guys, Property Search… Think Gladfish. I'm Brett Alegre-Wood and this is Property Rant.

So, today, what we're going to cover is yield or growth and I get this all the time from clients and I get this all the time from salespeople that I speak to. And it's almost like it has to be an either/or situation and I've always said all along that actually it shouldn't be an either/or, it should be both.

Now, here's one of the fundamental things when you're doing property and investing in property and choosing property. It's called fundamentals. It's called shops, schools, transport links, major employees, major investment. They're the components that go into fundamentals. If you buy something with good, solid fundamentals, then actually, you've got the property which will keep you really, really happy over the entire period of ownership. And that doesn't mean there's not going to be issues and things like that, but the interesting thing here is that a lot of people mistakenly go, “Well, I want a yield property.” Actually, you can get both but what you tend to find and this is what they're actually saying without really realizing it is what you tend to find is a lower priced property gets you a higher yield and you sacrifice the growth.

Whereas a higher priced property will get you a lower yield but a higher growth. Now, depending on what level, whether it's a 100,000 property or a 200,000 pound property or a million pound property, a million pound property is going to be much higher growth and actually the growth component will be a lot more because let's say, and this is a roundabout and this goes for a number of countries around the world.

At lower yield or higher yield, you're going to look at around 8%, somewhere between 6 and 10, I would say, would be what I would consider high yield and some people will say 12, 15s. I'll talk about that in a second. Eight percent yield and 5% to 8% growth-ish maybe. Sometimes, it's a lot less, and what you tend to find is this type of property, this lower price, actually when you do have a downturn, it doesn't recover as quick.

Whereas this stuff which has much better fundamentals because it's more of the higher price, actually recovers a lot quicker and so you're getting this every single year. So, it's one of these things where actually it depends what you want or you can get in the middle for both, all right?
So, some companies just sell high yield. So, they'll say, “We don't sell anything less than 10%.”

But the other thing is, you've got to look at how they calculate yield because a lot of times, that is deceiving and it's a deception because what they do is they'd say, “This is the rent,” and the rent is actually above what it really is going to be. “This is the mortgage,” and the mortgage is always cheaper than what it's going to be, and, “This is the profit per month,” and it's not profit per month. You've got to add in management fees, you've got to add in void periods, you've got to add in all these costs along with keeping a property and holding it over the long-term because property is not necessarily a trading game. You're not getting in and out and in and out and in and out, stamp duties and all those costs have to come into it.

So, generally, you're going to hold a property for a long period of time, I'm talking about 7 or 10 years. The reality is I'll probably hold mine a lot longer, all right? So, the whole thing here and what I say is but both, you want both of these, but depending on your income or depending on your need for capital.

So, if you've got a really good income, high income, then you can tend more towards this side of the game and focus more on the capital because you'll make more money from the capital than you will with cash flow. But if you've a limited income or you're just after an income, then you can focus more on this side which is the high yield side.

So, this comes down to strategy, portfolio strategy, and it just depends on your individual circumstances. If you've got lots of debt that's weighing you down from a cash flow perspective, then stick to the cash flow side, or the high yield side. If you haven't got that and you've got virtually no debts apart from say mortgages, and you've got good income, then go for more the capital side because you'll make more money this side than you will this side as a total.

Now, interestingly, what I work on is this, about 3% to 10% is what I would say is a normal yield.
Ten percent above, I'd be very skeptical. And 15% and above, I'd run for the hills because I don't believe that you can make 15% sustainable year after year after year after year, so it's probably a deception.

Now, a lot of times what people will do is they'll put rental guarantees in for the first couple of years at say 8%, all right? Now, at 8%, what you've still got to do in doing your research is check the market because you might find the market is actually 4% and all they're doing is they may have upped the price, taken some of that price and put that into a rental guarantee so you think that it's a good investment, but remember, you'll probably be owning it for longer than the period of that rental guarantee.

So, that's just some things to think about, yield versus growth. For me, I'm a growth person, I'm more focused on this end. That doesn't mean that I don't consider this but we get lots of clients that are this focused, not this focused and we've got lots of clients and we certainly educate them to consider both. And as they build their portfolio, you may find that you build a bit too much on the capital side, so you come across on the cash flow side and vice versa.

So, that's with the portfolio strategy, and if you want to learn about that, then speak to one of the team and they can take you through all the strategy stuff under the portfolio managers.

All right, guys, have a great day, live with passion.

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