I take the point you are trying to make but feel this is a poor example. For the deposit account to allow him to withdraw the rental equivalent from the account AND have the balance increase to £100k, means that the interest he has been receiving has, in fact., been greater than the equivalent rental yield, because the depositor much have been undrerdrawing the interest to enable some to remain in the account for the balance to have grown.
NO, you have forgotten that for this to happen you must be leaving the interest in the account which means you are re-investing the interest, which is the same as re-investing the rent into new property,
Well, because we are assuming a *CONSTANT* return on money invested (5% in the above example) - but you would be saying that your "yield" is increasing and increasing and increasing ...
So, even though you are getting the *same* return now as you did some years ago, you are going around saying that your yield is increasing. Is it just that you want to tell people that your yield is more and more each year, even when really it is not?
That was not the example being referred to!! [Look back, or up there ^^^!] The 5% relates to 7K rent & value 140K. Obviously, if the property was instead worth 200K & the rent were 5K, then the yield would be only 2.5%.
Firstly, the example is quite valid whether or not you re-invest *all* the interest, or just *part* of the interest. If you re-invest just *part* of the interest, then the part withdrawn can be compared to "rent" on property, and the part re-invested can be compared to the "capital appreciation" of the property.
Basically, in one corner you have: (A) Property - pay a lump to buy, receive a regular income throughout ownership, receive a (hopefully larger) lump when sold.
In the other corner: (B) Bank account - pay a lump at start, receive interest which partly increases the balance, the other part is withdrawn for regular income. At the end withdraw the final balance.
There is really no difference conceptually between these two scenarios, financially. [It may be easier, though, to reduce income & increase growth (or vice versa) with a bank account than with the property! :-) ].
Your are right there is no difference conceptually, but the comparison of the taking some/all/reinvesting interest is not a valid example because ALL of the capital 'growth' from the bank account is a result of interest. IN fact every bit of interest that is left in the account is really a NEW investment.
Then the yield goes up, of course. Rental yield is the property not of a particular investor's investment, but of a particular house at a particular time. If the house were to be sold by one landlord to another, with a continuity of tenancy and no change in rent, then the new landlord gets the same yield immediately after the sale as the old one was getting immediately prior to it.
"Rental yield" doesn't really make sense any other way than to relate current rent to current value.
If the value of the property goes down, then the landlord is still getting the same return on his original investment. So long as that rent keeps being paid, and in a theoretical situation lets assume that goes on for ever, then the value of the underlying investment is immaterial. UNLESS you wish to compare with other investments.
Granted - and also, the original amount paid is similarly immaterial. All that matters when considering the investment is the future - ie what you'll get for it as you own/dispose of it into the future.
So you've just pushed the argument towards the conclusion that no yields (whether based on original price or current value) have any meaning. Er - OK, then.
I agree - *neither* the capital appreciation in the property *nor* the increasing balance (from interest) in the bank are "new investments".
"john boyle" wrote
Er, no, not usually - isn't the *default* position to have interest accumulate in the a/c? Therefore, no "election" necessary!
"john boyle" wrote
Perhaps - but that doesn't matter to "you" at all - the internal workings of the asset of "bank a/c" is pretty irrelevant to it's outward properties - all you see is the amount of your balance increasing (just as when the surveyor/valuer tells you your property is worth more & more each time he looks at it!).
Yes - exactly as the bank a/c balance is to the customer!
You devious person you, I was only referring to One of those! :-)
It depends on the account and the terms offered. One b/soc that I have knowledge off offers the interest to be paid to any account you want on every account.
No, you have a basic misunderstanding here between assets and income. Your 'perception' is irrelevant. All of this thread has been based on facts and accounting, you cant cop out now.
Yes. BUT the receipt of interest is an income & expenditure item.
Lets go back to the treatment of interest. No matter how you personally perceive it, the payment of interest is 'income' to the account holder. I cant help it if you cant grasp this point, but it is a fact. IN fact, interest that has been accrued but not paid is still 'income'. It is not a Capital Gain, Nobody regards it as so and it is not taxed as such. Once that interest has been credited to an account, any account you like, it is reflected by an increase in the balance of that account as a new investment. That is a fact. Propetry value is matter of opinion.
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