It may seem a simple task, but working out the potential rental returns on an investment property requires doing a bit of homework, and is more than a simple calculation. Here are a couple of things to consider when working out your sums.
As you would expect, every property investor aims to own a property with a high yield that will also deliver a large capital gain, as well as returning a strong rental return and of course needs very little maintenance undertaken, however in most cases this is not a realistic expectation and difficult to achieve.
There are lots of terms, such as rental yields, gross yields, net yields and capital gains, and what is most important to you will vary dependent on your own circumstances. As someone who does like to err on the side of caution however, I advise my clients to really look at the net yield – what will your ‘actual’ income be once your deduct expenses such as maintenance, insurance, professional service fees etc. You will often hear the net yield described as the rate of return. While there will be variances in these costs, your accountant will be able to provide you with some guidelines around estimates.
To calculate your net yield, take the annual rental income and minus the annual expenses or loss of rental income from this. Then divide this number by the property value and multiply this number by 100.
Property value $600,000, expected rent $500 a week and expenses/loss $5000. $26,000 ($500 x 52 weeks – annual rental income) – $5000 (annual expenses/loss) ÷ $600,000 (property value) x 100. Yield = 3.5%
Expenses can include: buying and transaction costs (property purchase price, legal fees and building inspections, any start-up loan fees), annual costs such as vacancy costs (loss of rent and advertising), repairs and maintenance; property management fees, insurance, rates. And of course the bonus is that as expenses these can be off-set against your income when it comes to taxes.