Rental Yield Doesn’t Actually Matter When Looking For Positive Cash Flow Property
When it comes to finding positive cash flow property, rental yield doesn’t actually matter and isn’t a true indicator of cash flow.
When trying to find a positive cashflow property, a lot of people look at rental yield as the beal and endo for whether or not a property is going to be positive cashflow. If it’s got a certain rental yield, they say yes, it will be. If it’s below a certain rental yield, they say no. A white be. In this episode I’m going to talk about why rental yield doesn’t actually matter when it comes to finding positive cash flow properties, and in fact it does matter a little bit. It can be a good tool to quickly knock out properties that just will never meet the criteria or even come close, but as we’ll look through a bunch of examples today, you’ll start to see that properties, even with the same rental yield, one can be positive cashflow and one can’t be, and properties with Laura rental yields can be positive cashflow.
Whereas properties with higher rental yield may not be so. Rental yield can be a good guideline, but it’s not the be all and end all. So that’s what we’re going to be looking at in today’s episode. Now I first came across the idea of rental yields and how important they are for finding positive cashflow property. When I read Steve McKnight’s book zero to 130 properties in three point five years now, while that strategy probably won’t work anymore, buying 130 properties in three and a half years on a single income. That is still a really great book and there’s a lot of good concepts in there. So if you want to check out that book, go to [inaudible] Dot com.au forward slash 1:30. So a lot of good stuff in there about saving a lot of good stuff in there about the basic fundamentals of cashflow and stuff like that.
So Steve McKnight has this thing in this book called the 11 second rule. So he coined it as 11 second role. I don’t know why it takes 11 seconds instead of 10, but so be it. But basically the idea of the 11 second rule is that you take the purchase price of a property. So for example, if we have a property at 300,000, you then divide it by a thousand or you chop off three zeroes, so that becomes $300 and you then double that number. So that’s 300 become $600 and that’s the weekly rent that you’re looking for. So a $300,000 property, you’re looking for a rent of $600 per week. Or if you have a property that’s rented for $150 per week, how much do you want to pay for it? We do the same process in reverse you times that figure or you divide that figure by two times by a thousand and so you get $75,000 and basically this gives you a 10 point four percent rental yield, which kind of it, it’s not the gold standard of rental yields in positive cashflow property.
But when this book was written, it kind of alluded to being that. And now when this book was written, interest rates were higher. I think there are around seven or eight percent or something like that. Interest rates at the moment are quite low, four to five percent sort of thing, so you do need to take all of these factors into account, but anyway, this was my first experience to rental yield and how important it was and it’s a, it’s a good idea, but it just doesn’t play out perfectly as we to look at positive cash flow properties. So let’s use a few examples of properties and we’ll see how rental yield affects the cashflow. So let’s start with this one. I’ve got 36 Gros ventre street in Narrandera New South Wales. So this was for sale for $149,000. So pretty cheap property and it’s currently rented or it says previously rented at to 60 per week.
So what I’m gonna do is go over to property tools.com dot EU and I’m going to use the advanced property calculator over there. This is a property cash flow calculator that I created myself. So you put in purchase price, rental income and it will give you an eeg, an estimated weekly and yearly cash flow. And you can also look at adjusting all the fees so you got property manager fees, expect a vacancy repairs and maintenance, insurance council rates, bank fees, all that good stuff. So basically you can go through and you can add in all the expenses and it will give you a rough estimate of the weekly cash flow of a property. So this was something that I was doing all the time, so I just made this tool to make life easier for myself. So let’s have a look. One hundred and $49,000 as punch that in and then we’ll punch into 60 per week.
And this gives us an estimate of weekly cashflow of $34 and nine cents. And a rental yield of nine point. Oh, seven percent. So nine percent rental yield. That is a very high rental yield. You don’t find a lot of properties on the market with a rental yield that high. And we can say that, Yep, nine percent rental yield leads to a positive cashflow property. Now obviously there’s a bunch of other expenses that we could adjust here. Maybe because it’s an older property, we will need to increase the maintenance. Cancer rates might be a bit less because it’s a cheaper property, etc. So you can tailor with this sort of stuff yourself and so, but basically I want to show you that this property with a nine point. Oh, Seven percent rental yield. We’re looking at $34 a week. cash flow before tax. now let’s have a look at another property with a similar rental yield.
This property is cheaper. Um, can you believe it? Seven manson. Australian port pirie south Australia selling for $79,000 for a three bedroom house. This is extremely, extremely cheap. I just want to have a look at the population of port pirie in south Australia because I had no idea. All right. We’re going to say the population is 14,000 people, so not, it’s not a country town with only 300 people in it. So that’s cool. Anyway, solid investment returning nine percent with a secure tenant. And we can say that it’s rented until the 22nd of May for $150 per week. So let’s go back to our calculator, we’re going to put in $79,000 as the purchase price. This one almost works in steve’s 11 second rule because they’re almost got a 10 percent rental yield. We’ve got a nine point eight, seven percent rental yield, but we can see that our weekly cash flow before taxes actually in the negative of about $10 per week.
So this has a higher rental yield than the previous property that we were talking about, but it’s negative cashflow. and what’s the reason for this? Well, as you go cheaper and cheaper in the property market expenses like repairs and maintenance or insurance on council rates or bank fees become a higher percentage of your overall cost of the property. So if you’re paying $2,000 in cancer rates for a $79,000 property that’s only generating you how much per year is, uh, generating, that’s only generating, you know, $8,000 in rental income or a bit less than $2,000 out of $8,000 is a significant amount. And so as properties get more expensive and the rental income increases, then your council rates as a percentage of your rental Income become less and less, so you’re getting more rental income. Cancer rates might be going up and getting a bit more expensive, but they’re not getting significantly more expensive as compared to your rental income.
So as you go to the really cheap side of the market, rental yield plays less and less of a role just because of those fees that council rates and things like that. Let’s go ahead and have a look at another property which is about $200,000. So a bit more expensive than that first one. we looked at at 149. And let’s have a look at the rental yield. So we’re getting $310 per week for this property. So let’s punch that into our calculator. 200,000 dollars and we’re getting 3:10 per week. so we can see that this is looking like it might have a weekly cash flow of 39, $39 per week. But something that we need to take into account, because this is a unit instead of a house, is something called body corporate fees, strata fees, body corporate levies. They go by all of those names and we can see here that the body corporate levy is 2000, $131.
So this has to pay for the communal areas and things like that as well as go towards sinking funds. YOu don’t have a choice, you have to pay this. It’d be part of the building. This is something that you can avoid where you have your own property, just a house because you’re in charge of all the maintenance and stuff yourself. So 2000, $131. So let’s go ahead and add that in into the strata or body corporate. Two thousand $131. And we can now see that this has gone from a positive cashflow, about $39 a week to negative cashflow of about a dollar 62 per week. And so this one has a rental yield of about eight percent. Eight point oh, six percent. Which is still really good, it’s more expensive, but because it’s a unit and it’s got that body corporate fee that really stripped us of our cashflow.
So that’s another example, a bit of a different one about how rental yield doesn’t necessarily matter when it comes to cashflow because you have to take into account so many different things. Body, corporate fees being one of those. So let’s go ahead now and look at some properties with extremely low rental yields that would never, ever even come close to the ten second rule. 11 second rule. Sorry. Statement nights. 11 second role. So I’ve got this property here that is in Georgia, whole new south wales 40 endeavour road, george’s whole new south wales for $849,950. So this is somewhere in sydney, out kinda near liverpool, more bank area. Um, I’d aCtually lived in sydney my whole life and I did not know that there was a suburb called george’s hole. So I apologize for anyone who lives in Georgia. So. Alright, so $850,000 basically. Uh, let’s go ahead and type that in eight, four, nine, 9:50, and then the rental income for this property is 950 to a thousand dollars per week.
So let’s go on the bottom end, 950. And so we can say that this property has a rental yield of five point eight, one percent, which is not an extremely high rental yield. It’s Not bad, especially for sydney. This property has multiple dwellings on it. Um, so there’s two separate, one bedroom fully contained retreats as well as a house. So that’s, I guess we’ll push this into a higher rental yield and probably the houses next door and stuff like that. So that’s pretty cool that it’s got that rental unit in sydney, but five point eight percent for rental yield when you’re looking for positive cashflow property is usually a sign that a property won’t be positive cash flow. But as we can see here, five point eight percent yield. our estimated weekly cashflow is 109,000, $109 per week. So getting some positive cashflow that despite the low rental yield, when this other property, the $79,000 property had a nine percent yield or more than nine percent and it wasn’t getting positive cash flow property.
So one last example here is this one in new lampton which is in newcastle. So this is a $900,000 guide and the rental potential is $900 per week. So let’s go ahead and put in $900,000 and $900 per week. So this is half of steve mcknight’s 11 second rope. We’re getting a five point two percent rental yield and we can say that as weakly positive cashflow of $26 per week. Now I’m looking aT interest rate of five percent across all of these. This calculator does look at interest only loans. I’m not principal and interest loan, so that’s something to take into account I believe when looking for positive cashflow that well in the current market principle and interest loans, you can often get a cheaper interest rate, but I believe that any money that you’re paying off the principal, you’re getting extra. I believe that’s positive cashflow, even if you know you’ve got to pay it as part of your mortgage payment.
That’s the way that I say it. Anyway, all of these examples, we’re looking at interest only at five percent, so that’s just something to keep in mind. BUt yeah, 900,000 rental income of $900 per week. Five point two percent rental yield, which you would not expect to be a positive cashflow property is actually looking like it’s a positive cashflow property and the reason for that is just because the purchase price is high, the rental income is high, so $900 per week gives us an annual rental income of $46,800 per year. And so when you’re looking at council rates of $1,972 a year, so basically $2,000 per year. But that’s coming out of a total income of around 47,000. So 2000 out of 47,000 is a lot less as a percentage than $2,000 out of 8,000 or even it was 1500 out of 8,000. So because things like your council rates, your insurances and stuff like that, or a smaller percentage of your overall income than that is going to affect whether or not you’re more likely to get a positive cashflow property.
So basically the rule of thumb that you can look at here is that rental yield is an interesting figure, but it’s not the be all and end all. You really need to combine rental yield with purchase price if you want to do quick calculations to determine whether or not a property is likely to be positive cash flow. So if we’re looking at the super cheap properties under $100,000, then we really probably do need steve mcknight’s 11 second rule. We need that nine or 10 percent rental yield to have a hope of getting a positive cashflow property. But once you start getting up into properties around 800,000, 900,000, a million dollars that are renting for $900 a week, you know, then a five percent rental yield at the current interest rates can generate a positive cash flow. So it also determines it also. Sorry, depends on the interest rate at the time.
So let’s say there’s five percent interest rate, all of a sudden became a seven percent interest rate. So in the property calculator here, we can change that to just seven percent and you can say it’s instantly changed our weekly cashflow from being positive of $26 per week. If we increase that interest rate by two percent, that becomes negative $250 per week. So as rental yields as, sorry, as interest rates change than the rental yield that you need changes as well. So with the interest rate of seven percent, what rental yield do we need before we get to positive cashflow? So let’s just type it in. So I’m going to put 1200 per week. Okay. 11 50 knots still negative. So basically 1200 per week. So we need a rental yield of around six point nine, three percent. If that interest rate was to go up to seven percent.
So there’s all of these different factors that coMe into play. You’ve got the price of the property, you’ve got the council rates and stuff as a percentage of total income, so you’ve got those sorts of things to think about. Then you’ve Also got units and body corporate, that sort of stuff to think about and you’ve got interest rates to think about as well and as they fluctuate, as they go up, then you need a higher rental yield as they go down. You don’t need as high a rental yield, so rental yield can be useful, but in this video, in this ePisode, I just want to encourage you that rental yield when you’re looking for Positive cashflow isn’t the be all and end all of finding positive cash flow propertieS. It’s one tool in your toolkit to quickly cancel out properties, but you need to take into account purchAse price, rental income as well.
Look at those figures and that’s why I love this advanced property calculator because I don’t need to look at an 11 second rule. I don’t need to look at that sort of stuff. I can just punch it into this calculator. I can put it in $79,000 for $150 per week at a five percent interest rate and see that it’s negative cashflow or of interest rate was four percent. I can see that it’s positive cashflow, so this tool just does all the hard work for you. So basically if you’re looking for positive cashflow property, you want some help doing the numbers. this tool looks at all of the different major expenses you’re going to have when owning a property and so you can go through and adjust these expenses as well to get a more accurate figure, but really I love to use it. Just purchase price, rental income, punch it in.
That’ll give you a better rough estimate than if you’re just looking at rental yield. So if you want to check out this tool, if you want to use it, I have made it available to people for a small monthly fee. So just head over to property tools.com dot a u and you can see the details about it and sign up over there. If you are actively looking for positive cashflow property, then this tool is a no brainer. It’s just going to help speed things up so quickly and as well. If you’re really serious about finding property, as I said, you can go through it and really adjust all the council rates and things like that, and then you can even save the calculation as a pdf so you can print it off, share it with your partner and talk through them with it or share it with your accountant and things like that. So really cool Tool. Again, that’s a property tools.com dot a u. So I hope that this video has helped you to see that rental income isn’t the be all and end all. Rental income doesn’t actually matter when it comes to finding positive cash flow properties and it doesn’t matter because you need to take into account so many other different factors that can affect the cashflow of a property. That’s it from me today guys. Until next time, stay positive.