Purchasing an investment property is very different to buying a home for yourself.
It’s natural to be caught up in the emotion of purchasing a home you plan to live in. But you must be clear-eyed and focused on the bottom line with an investment property.
You want to weigh the cost against the prospective rent and the resulting yield, which should be around 6%-8%. Below, we explain “yield” and why it’s important.
When selecting an investment property, you must consider the local tenancy market. Are your likely renters students, families or seniors? Generally, these groups want good access to education, schools, public transport and shops.
Despite the current rental vacancy crisis, even home-hungry tenants will look for properties that suit their needs.
An investor who doesn’t consider these details should expect to see their empty property lose money, so research is critical.
Our property management team will suggest you use the services of a financial advisor or accountant to understand potential tax implications, such as negative gearing.
These professional advisers will also guide you in calculating rental yield, which measures how much income you can expect to earn from a rental property.
Yield is expressed as a percentage of the property’s value and helps investors evaluate the potential return on their investment. There are two types of rental yield and why they’re important:
- Gross rental yield: Income generated before expenses. You divide the annual rent by the property’s value and multiply by 100. A $500,000 property that generates $30,000 annually has a gross rental yield of 6%.
- Net rental yield: The only difference to the above calculation is that you add all your expenses. Net rental yield provides a more accurate picture of your return.
- Price setting: You can use yield to determine the rent you intend to ask. However, local market trends may be a better way to determine the appropriate rent.
- Tracking progress: The sums will change regularly. Property values and rents will go up in all likelihood. So, by calculating your yield periodically, you will see whether your investment is performing to expectation.