As an investor in property it would make sense to identify your property wealth to see how you are doing right?  However even though there are lots of investors and property isn’t exactly a new investment, there are so many ways to measure ones property wealth and many of them are not really very helpful.  In fact if one used certain standards you would really paint yourself into a Dante like nightmare.

For example some people look at their net equity to measure their property wealth.  If you own 2 million dollars worth of property and have 1.5 million dollars worth of debt your property wealth is $500,000.  But is it?

For newer investors we have all learned in the last 18 months that this measurement in isolation is somewhat meaningless if you can’t sell your property at valuation if you need to.  I recently sold a property with a genuine valuation of 1.8 million less than a year ago, for 1.1 million last month, so my “wealth” in that property vanished overnight.

Another common form of assessing our property wealth is based on yield and cashflow.  Now this is a critical number to know and is certainly relevant to every investor but depending on how you work it out we can often come up with some meaningless figures again.

For example we see gross yield quoted a lot by agents in adverts. Gross yield is simply the annual rent divided by the purchase price.  So a $200,000 property renting for $300 a week = 7.8% ($15,600/$200,000)

NOTE: This is the only yield figure you ever see in adverts from agents and it means absolutely nothing.  You see if you want to use yield to measure your property wealth then you must work on net yield which is (annual rent MINUS OPERATING EXPENSES) divided by the purchase price.

So in our above example:

Rent = $15,600

Less rates ($1500) = $14,100

Less insurance ( $400) = $13,700

Less Property Management fees ($1250) = $12450

Less vacancy ($600) = $11850

Less maintenance ($2000) = $9850

So the actual yield on this deal is 4.92%

Agents and others often say “We have to quote the gross yield because everybody works out net yield differently”.  I say “Bah humbug”.  The reality is that net yield figures make many properties look like terrible investments and that makes them harder to sell .

But for you and I, to understand our actual property wealth we must know our net yield on our overall portfolio.

Now there are of course lots of strategies where yield doesn’t matter, as I talk about in detail HERE, but they are strategies to provide income or profit so you reduce debt.  On your buy and hold investing you must deal with net yields.

And when our income based on our net yield pre-tax is less than or equal to our outgoings then our property wealth is zero!!

We start to have wealth when we can stop work and hold our property portfolio until our death.  In fact the best general definition of wealth, or in this case property wealth that I can think of is:

How long can you hold your existing property if you stopped work.  In other words how long before you had to sell property??  You have “arrived” when the answer to that question is never.  This means your property wealth is expressed as my after tax income now exceeds my pre tax outgoings.

This is true property wealth!

Stay Inspired and Stay Safe ~ Dean Letfus

The Ethical Investors Strategist

PS: Time is running out to join us for Saturdays event!! IF you want to learn how to

• Invest with no money
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PLUS many other strategies and. ideas and top tips AND connect with like minded investors and find JV partners etc. then you need to be there. More info and bookings at http://retirefromproperty.com

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