Caution, Interest Rates and 13% Gross Yield

10 November 2016

CAUTION,  INTEREST RATES AND 13% GROSS YIELD

How do you buy a good property, in a good area, and get 13% Gross Yield?

Last night, the Waikato Property Investors meeting focused on 'maximising what you have'.  So, rather than buying a new rental with a poor return, you might be able to subdivide, build a minor dwelling, or build a duplex.  It was all about focusing on your current rentals and trying to maximise the return.


My favourite example, given by one of the speakers last night, is renovations.  The example was a renovation of a one bedroom unit for $20,000.  New kitchen, carpet, toilet, laundry tub, etc.  After the renovation the rent was increased by $50 per week, and the speaker thought it could really go up $60 per week.

So that is around $2,500 extra rent per year, or a 13% return or gross yield on the $20,000!  If you borrowed the $20,000 at current interest rates, it would cost around $900 per year, so would improve the rental's annual cash flow by approximately $1,600 per year.

The speaker also thought the $20,000 renovation would improve the value by $50,000!

So a simple renovation can give a great gross yield, improve cash flow, and create an equity gain.
 

Interest Rates

ASB recently increased their 3, 4 and 5 year rates.

BNZ just followed and increased their 3 year rate.

So while the OCR goes down, it seems the long term rates are going up.

No one has a crystal ball, and with all the uncertainty at the moment, I think we are all guessing.  One option is to spread your loans into some short term and some long term.  This means you win either way, rather than gambling on one outcome.

If you haven't already, I suggest you review your interest rate risk and strategy.
 

Caution

No one knows exactly what will happen with the property market.  Some people say it will crash.  Some say that it will go flat and yet others say that it will continue to boom. 

In my opinion, it is not a time to gamble and take a big risk.  If you are buying a new rental, I feel that you need there to be good cash flow or a large equity increase available through a twist.

With interest rates being so low, I feel that investors should be taking advantage of this and paying down debt.

Kind regards
Ross Barnett