• Tweet
• Email

Well I admit I was a little naughty last night. I deliberately made a mistake in my calcs just to see if anybody would notice. Given that although as investors we all need to KNOW about numbers I should have been surprised that no one noticed, but it appeared no one did.
Anyway that aside I wanted to go into a bit more detail on the numbers side of things again today as I want to somehow get you to think your way out of this “must have cashflow” mindset.

My camera is misbehaving so it is text only tonight I am sorry. Should be fixed tomorrow!!

One way I may be able to help you with thinking differently is to try to show you just how I think about the numbers on a deal as it relates to yesterday’s blog about gearing.

So here we go with today’s purchase: You decide what you would have done as I tell you the story.
Agent rings me with a property in Papatoetoe. It’s in a great part of Papatoetoe, brick and tile, agent offers me the property prior to going to market as vendor is an investor and keen to exit cleanly.

Numbers are
1. Rented for $290 a week
2. RV will be close to 400K
3. Spoke to 2 agents. 1 said could resell for 400K, other said 360 to 380K
4. Agent advised that low to mid 3′s should buy it

So based on only this info what would your thought processes be?? Let me guess

First “Only $290 a week rent”!! “You’d have to buy it for about 160K to have it paying for itself, forget it”

Am I close?? Now come on be honest with me, this is what most of you would think.

What did I think??
First Papatoetoe has average growth of over 10%, WAY over, so the growth in the property is bullet proof, (power of knowing an area)

Second based on my 2 agents numbers, (power of having a trusted agent), property is worth at least 360K on the open market so I would have to buy it at no more than 310K as a trade, (sticking to my rules of 50K minimum margin).

Third because it is brick and in a high growth area, (power of clear buying rules), and the RV is going to be more or less 400K, (power of having a valuer on your team), I could buy it for up to 340,000, (minimum 15% discount), and keep it long term as a rental.

Now notice that my thought processes are complete and I haven’t considered yield. Why?? Well because I don’t care. I’m serious it doesn’t matter. So what did I do??

I made a cash offer at 310K, they countered back at 325K, bought it unconditionally at 320K.

Now why don’t I care about yield?? Because I understand what I tried to explain to you yesterday.

Lets look at the deal

Purchase Price 320,000 x 8% interest only = $25600 per annum
Rates and Insurance = $2500 per annum
maintenance, vacancy etc. etc. = $4000 per annum

Total holding costs $32100 per annum

Income Rent $15080 per annum
Depreciation/chattel dep $7000 per annum
capital growth $40,000 per annum (average)

Total income $62080

So I am $29980 better off in the first year owning this property than not.
That does NOT include the EIGHTY THOUSAND DOLLARS I MADE TODAY IN EQUITY JUST BY BUYING THE PROPERTY.

Add that in and I will be $109980 better off in 12 months than I am today by owning this property.
What was the yield?? Who cares!! It is 4.7% GROSS but I can live with the $109,000 net worth increase on 4.7% yield.

Do you get this??
How many other ways can I say “STOP WORRYING ABOUT YIELD”!!