Getting this wrong in 2026 can kill Portfolio Growth! - Simon Loo & Todd Sloan

Added: 2026-06-03

[00:00:00]Your rental yield and cash flow is more important than ever right now.

[00:00:03]>> The Reserve Bank has hiked interest rates for the third time in a row.

[00:00:06]>> Don't make decisions based on this percentage yield. Work out what the true cash flow is.

[00:00:11]>> But now that negative gearing's gone, do you really understand the difference between your yield and your cash flow?

[00:00:16]One of the mistakes I see a lot of investors make today is Together with Simon Lu, property investor and founder of House Finder, we're comparing two rental properties, [music] same price, practically the same yield, but very different cash flow.

[00:00:28]>> It's extremely [music] misleading. Just because the yield is high, it may not mean the actual [music] cash flow is accurate.

[00:00:35]>> Because of all of these new tax and rate changes, you can now better understand yield versus cash flow.

[00:00:40]>> That's what I'm here for.

[00:00:41]>> You want to talk about it, Simon Lu?

[00:00:43]>> Not really.

[00:00:44]>> [laughter] >> Starting with enthusiasm.

[00:00:47]>> Not really, because it's one of the earliest and first mistakes I ever made in property.

[00:00:52]>> There's a sore spot here, isn't there?

[00:00:54]>> Yeah. [clears throat] Many, many, many, many moons ago.

[00:00:56]>> Mhm.

[00:00:56]>> Many decades ago. Actually, not many years ago, not decades. I'm about old. I bought a townhouse in a suburb called Woodridge >> Yeah.

[00:01:04]>> in Queensland. I was lured into this amazing property >> Mhm.

[00:01:09]>> because of the yield. Now, for listeners that don't know what yield is, it's a percentage. The percentage is calculated based on typically the weekly rent >> Mhm.

[00:01:21]>> times 52 weeks in a year >> Mhm.

[00:01:23]>> divided by the purchase price. Now, if you look at how much you're paying interest along with all the other holding costs of the property, and you've got a particular yield that you're working towards, it's typically a good guide to determine whether the house or property is going to be cash flow positive or negative or neutral.

[00:01:44]>> Mhm.

[00:01:45]>> However, it's extremely misleading because just because the yield is high or the percentage is high, it may not mean the actual cash flow or the dollar that you spend or the dollars that you save is accurate.

[00:02:02]>> And this is what you found out the hard way in the early days.

[00:02:04]>> I found out the hard way because this townhouse was only $155,000 when I bought it.

[00:02:11]>> Seems like a dream.

[00:02:12]>> Seems like a semi-expensive car, right?

[00:02:15]And I got a property, a three-bedroom property out of it. And the yield was 8.3% as it was marketed to me.

[00:02:22]>> So even back then that was high.

[00:02:23]>> That was This looks amazing, right? Like if I had that today, I'd sell billions of them, right? But what I failed to focus on back then was a very large holding cost called body corporate. And for this particular property, the body corporate was around about $1,000 every quarter. So over a course of a year, obviously about $4,000 worth of extra holding costs.

[00:02:49]>> Mhm.

[00:02:50]>> Now at a $155,000 purchase, the rent was around $250 a week.

[00:02:56]>> So you've lost almost what, 100 bucks ish?

[00:02:59]>> It ended up being negative cash flow by about $2,000 every year, right? Which doesn't sound terrible, but not something you'd expect on a 8.3% yielding property at $155,000.

[00:03:12]>> And hence why it's so important to actually understand the difference between yield and cash flow because 8% like you're saying, you'd be like, this must be a cash machine.

[00:03:20]>> Yeah, exactly. And one of the mistakes I see a lot of investors make today is they've got this target yield number.

[00:03:26]Look, 8.3% yields don't really exist on anymore unless you're buying in very undesirable areas. But you know, a very common one we hear is 6%, you know, or even 5 and 1/2% and you know, we may present a property or they might come across a property that's only 5% or 6% or 6.2%, right? And they're knocking these properties back and they're saying no to them because it's just not hitting that imaginary number that they've got in their heads.

[00:03:52]>> So, it's the point something percent off and that's that's >> Yeah, yeah, exactly. And they're saying no to a deal that can potentially make them hundreds and hundreds of thousands of dollars in a very short time.

[00:04:02]Right? But, if you do the analysis, that point zero two percent or point zero three percent difference may only be 30 bucks a week, you know, 40 bucks a week, $20 a week difference. And I'm not saying that's not a lot of money for, you know, different people have different circumstances. But, if that was the deal breaker, I think people can be potentially making some very poor decisions. You know, based on the sort of yield and the the the percentage yield alone.

[00:04:25]>> Well, and this is why I wanted to do it more of a direct comparison because something that's kind of come up in a little bit of conversation and one of the big parts about this episode is [clears throat] like comparing you're looking at a yield sometimes that is more attractive in Queensland, but then less attractive in Victoria. But, then even if they're roughly the same, let's say you're actually getting a better yielding property in Victoria and then a lesser yielding in Queensland now cuz they're not hugely different anymore.

[00:04:50]They used to be very very different.

[00:04:51]>> Yeah.

[00:04:52]>> But, the cash flow on the other end can be quite different.

[00:04:55]>> Yeah, absolutely. Look, I mean, using those examples and at the time of recording, let's say you've got a $650,000 budget.

[00:05:01]>> Mhm.

[00:05:02]>> Right? In Melbourne, you can potentially buy a house in some of the outer suburbs.

[00:05:06]>> Mhm.

[00:05:07]>> In Brisbane, you're limited only to uh townhouses and villas now, right, in the outer suburbs as well.

[00:05:13]>> Mhm.

[00:05:13]>> Cool.

[00:05:14]So, immediately, you've got the difference of body corporate and strata.

[00:05:17]And it may not be $1,000 a quarter, but even if it's $500, $600, $700 a quarter, it's still going to make a dent.

[00:05:23]>> Can we run through some of the numbers that you guys you've actually put together here because I think this will really illustrate the point you're making.

[00:05:28]>> Yeah, absolutely. So, $650,000 in Queensland as an example, you're obviously looking at a townhouse. In terms of the holding costs, you've got your council rates around $2,400 a year. You've got your strata around $4,200 a year. You've got your water maybe $1,200 a year. You've got your insurance, which is because it's a it's a townhouse, you typically wouldn't if there is strata involved or body corp involved, you wouldn't necessarily get building insurance, only landlord insurance. You might be looking at about 500 bucks a year.

[00:06:01]>> Mhm.

[00:06:02]>> You've got your property management, which is 7% or thereabouts in Brisbane at the moment, so that's about $1,700 a year.

[00:06:09]>> And these have all been worked out off of 6% interest.

[00:06:11]>> Yeah, 6% interest. You've got your 20% deposit interest only. You've got your 20% deposit and overall, you're going to be negative cash flow by around about $16,000 a year. The percentage yield on that >> That's what I was about to ask.

[00:06:28]>> will be 3.8%, so very low.

[00:06:31]>> So, you're sitting at 3.8. Now, why don't we jump that straight into a comparison with Victoria?

[00:06:35]>> So, Victoria, you're looking at a house now. The yield is about 4%, >> Okay.

[00:06:41]>> which is quite similar.

[00:06:42]>> yeah.

[00:06:42]>> 650 purchase, correct. So, very similar.

[00:06:45]Your holding costs, let's run quickly through them. You've got your council rates, 1,500 bucks a year. You've got your water, >> So, council's already like 1,000 bucks a year cheaper.

[00:06:53]>> Yeah, correct. You There's no strata, obviously it's a house, but you got you got a bit of water, that's 750 bucks.

[00:06:58]You've got your insurance, that's about $1,700 a year. You've got property management, it's a little bit lower in Victoria, 1% lower, so it's 1,500 or $1,550.

[00:07:10]>> Mhm.

[00:07:11]>> And then, interest is the same. So, the negative cash flow on that property is $12,000. So, even though the yield is almost exactly the same, >> Mhm.

[00:07:19]>> the cash flow, the real cash flow can be vastly different.

[00:07:23]>> It's almost 100 bucks a week difference.

[00:07:25]>> Yeah, absolutely. And another thing that people don't take into account are are the differences in different states. So, for example, in Victoria, you've got a lot of land tax pretty much off the bat.

[00:07:35]>> Well, and that's including 1,500 bucks a year land tax, isn't it?

[00:07:37]>> Yes, that's correct. Yeah, so if you know, if you were to buy a typical $650,000 house in, I don't know, suburb in uh Broadmeadows or Melton or Werribee or wherever, you're typically looking at a minimum of around 1,500 bucks a year of land tax because the land tax threshold in Melbourne is only 50k at the moment. Uh so basically anything you buy is going to trip that threshold.

[00:07:59]>> Might as well be nothing.

[00:08:00]>> So both are around 4% rental yields, but one's going to cost you a lot more, right? And one's going to cost you a lot less in real terms.

[00:08:07]>> And this is the funny thing because I'm sure you have these conversations all the time about people going, "Oh no, I don't know about Melbourne because of land tax."

[00:08:14]>> Yeah.

[00:08:14]>> And it's like, well this is including land tax. Now obviously this changes if you were to buy like five properties, your land tax jumps up pretty exponentially. But just looking at this as a straight comparison of one to one, 100 bucks a week roughly in cash flow difference for pretty much the same yield, this is further illustrating your point of this is why it's not just about the yield. It's about understanding the cash flow.

[00:08:34]>> Yeah, 100% and look, I mean the other thing that people don't take into account is the yield changes very rapidly, right? Like literally in the first 12 months, most of the properties that I buy at the lease renewal >> Mhm.

[00:08:47]>> you would bump up the rents, right?

[00:08:48]Because one of the things all the fundamentals that I look at are areas where there's very high rental demand, very low vacancy rates. So typically, you know, I mean some of the properties we bought 12 months ago have jumped 100 to 150 bucks a week already.

[00:09:01]>> Mhm.

[00:09:01]>> Right? So what started off as 4% yield or 5% yield could immediately become 5 or 6% yield or even more, right? Like the houses that I bought 10, 15 years ago for myself, $230,000 each, they're now renting for 700 bucks a week, right?

[00:09:16]I don't even know what the yield is for that.

[00:09:18]>> Like a 20% plus like >> Yeah, like it doesn't So don't make decisions based on this percentage yield, you know, work out what the true cash flow is, but also take into account that it will change over time. And interest rates, right? That goes up and down over time. You don't want to sacrifice growth. You don't want to sacrifice performance for couple of 0.0 percentages off, if that makes sense.

[00:09:41]>> I don't know if you're hearing a bit of this at the moment, but it's something that I had a conversation with someone the other day that unfortunately is becoming a little bit more frequent.

[00:09:48]>> Mhm.

[00:09:49]>> And they were basically talking about, all right, I can scale this to I think it was four rentals and then they're like I'm I'm tapping out after that.

[00:09:55]>> Mhm.

[00:09:56]>> And and it's like, but I want to get to I think their goal was like seven and blah blah blah, won't go to all of it.

[00:10:00]And I was like, well, okay, when you say tapping out, how long are you tapping out for? And it's like, oh, probably can't buy for like another 12 months, 6 months, something like that.

[00:10:06]>> Mhm.

[00:10:06]>> Like, that's not tapping out. That's that's growing.

[00:10:09]>> Yeah.

[00:10:09]>> Like it doesn't have to be one purchase and then the next day another purchase.

[00:10:13]>> Yeah.

[00:10:14]>> And and I'm feeling like right now, you're right, some of the yields on some properties, no, they're not as attractive as they were 3 years ago.

[00:10:20]>> Yeah.

[00:10:21]>> But they're also the current yields.

[00:10:22]They're not the forever yields.

[00:10:23]>> Yeah, you're absolutely right. I know this doesn't sound like really good advice, right? But sometimes we're thinking too far ahead or planning too far ahead in property is actually not a good thing. Because if you go into property investing with the notion that you can only buy four properties or five properties as of today, that's going to start to impact the decisions you make on each of those properties, number >> That's such a great point. Yeah, yeah.

[00:10:45]>> And then the second thing you're going to be thinking of is uh you know, urgency, this FOMO. You're going to give yourself like, oh, I need to buy these four properties quickly, you know, back-to-back, you know, because I have that ability now, right?

[00:10:56]But yeah, like to like I mean, if I think, let's say you buy a property every 3 months, right? That would be quite aggressive, right? By the time you finish your four properties, a year into the future.

[00:11:07]>> Mhm.

[00:11:07]>> Right? A year before from today, the world was a very different place.

[00:11:12]Australia was a very different place.

[00:11:14]The interest rates were very different.

[00:11:16]The economies, the like everything, you know? So, and maybe your personal situations change, like I said before, you might get a different job, you might lose your job, you might get a I don't know, anything can happen, right? So, just do what you can at the time, >> Mhm.

[00:11:29]>> make the right decisions. Another thing that you we see a lot of is just people, you know, they've got another thing is very low budgets. You know, we get we get we sometimes come across investors that are like, "Oh, I've only got two or 300,000 dollars worth of borrowing power or buying power, but I'm really I'm I'm itching. I just want to buy more houses but buy more properties." And the end I'm buying like a one-bedroom unit in Coober Pedy or something, you know, that will never ever perform. But now that I've said that it'll probably shoot up >> [laughter] >> But >> But I know what you mean.

[00:11:57]>> You know what I mean?

[00:11:57]>> And this is kind of going into cheap versus value as well, but but also just wanting to pull the trigger for the sake of pulling the trigger rather than getting an asset that's actually going to complement the portfolio and move you closer to the goal.

[00:12:08]>> Yeah, correct. So, you know, I've always maintained like yield or cash flow or whatever whatever you want to call it is important but only so far that it it allows you to wait until the growth happens. You're not going to get rich making an extra $50 a week of positive cash flow, you know?

[00:12:25]>> I used to think that. When I very first I don't know if you were the same as well. Did you ever used to look at it in the earlier days and be like, "If I can just have 50 houses all positive by 50 bucks a week." Like that's the thing.

[00:12:35]And then eventually your mind kind of shifts to it like, "No, that that's not really how it works."

[00:12:39]>> No, it it doesn't. And look, I personally I if I look back at my the early days in my property journey, I probably made a lot of bad decisions uh in terms of the properties that I went for and the ones that I ignored just because the cash flow was a little bit lower. And there's so many variables. The tenant leaves. It takes you 4 weeks to replace the tenant. You know, that immediately throws off your cash flow.

[00:13:02]Right? You You have to replace an air con. You have to replace a hot water tank. That'll throw it off. You know, like I said, interest rates. So many things that are out of your control, right? So, have your buffers in place.

[00:13:13]What I'm trying to say is you're you're going to be negative cash flow whether you like it or not.

[00:13:17]>> So, in summary, you're wanting to have a strong yield when you purchase a property. Everyone does. But you've got to play the the hand that you're dealt with the market. Sometimes the market's higher, lower, whatever, but even going into the example of your first purchase, or one of the first by the sounds of it, it was a huge yield on paper, but the cash flow was horrendous. So, I'm really feeling that the the takeaway from this is basically make sure that you've got a reasonable yield, but don't just chase yield at the sacrifice of quality with the asset. But also, don't chase yield that looks really good on paper, that's an 8% yield, but your cash flow is actually >> rubbish.

[00:13:53]>> Yeah, exactly. Yeah, because there's some cost in there that you >> don't know about. I actually ignore yield now completely when I analyze my >> I don't know why we just don't look at net yield, like commercial guys. It just to me that kind of makes more sense.

[00:14:03]>> Yeah, absolutely. I mean, that's what looking at cash flow is, you know, ultimately. I think net yield, gross yield, it's it's still misleading. You know, just look at the raw numbers. It doesn't take that long anyway. You need it to calculate your cash flow anyway, so you may as well focus on that.

[00:14:18]>> Yeah. How much does this actually cost me, or how much does this actually make me?

[00:14:21]>> Correct.

[00:14:22]>> So, Simon Lu, is there any other words of wisdom you want to add to this one, man?

[00:14:25]>> Yeah, don't buy $155,000 townhouses.

[00:14:29]With [laughter] 8% yields and yeah, $1,000 a quarter in body corporate.

[00:14:33]>> [laughter] >> Yeah, that's a good warning.

[00:14:36]Simon Lu from House Finder, thank you so much for jumping on the show, man.

[00:14:39]>> No worries.