Have a Hamilton investment property? It’s good news. Want one? Read this first
Recent figures show Hamilton’s rental market is performing well, delivering property investors rental yields well above the national average.
Nationally, a rental property is netting investors yields of 3.70%, compared to returns of 5.40% in Hamilton.
If you’re a Hamilton investor, it’s good news! But if you’re yet to tap into the investment market, you may wonder what we’re getting so excited about.
Basically, the rental yield is the rental return on an investment property.
It’s an important indicator of how a property is likely to perform, and the cash flow it will generate. Working this out before you buy means you’ll be able to quickly decide if the numbers stack up, and if you can afford to service a loan on a particular property.
It’s a vital calculation before you head down any purchasing path.
But how do you make this calculation? Below is a number of steps to explain it, although note this is a general guide only. Our accountants and financial planners are vital advisors you’ll need to speak with before you proceed with any kind of purchase.
So, what exactly is rental yield?
When buying an investment property, investors typically consider two key factors:
- Capital growth, or how much a property is likely to increase in value over time, and
- Rental yield.
The rental yield is the rental income of a property, expressed as a percentage of its value. It can be calculated in gross terms (before expenses), or as a net percentage (with expenses factored in).
* Gross rental yield = (Annual rental income / Property value) x 100
Example: A property with a market value of $500,000 that returns a weekly rent of $500, or $26,000 a year ($500 x 52), would have a potential gross rental yield of:
($26,000/ $500,000) x 100 = 5.2%.
Sometimes, gross rental yields are calculated as a percentage of the original purchase price, rather than the market value. This can affect the outcome. For example, if you used an original purchase price of $400,000 in the example above, the gross rental yield would be 6.5%.
Overall, the gross rental yield offers a simple way to compare properties quickly. It gives you an overview of how the rental income compares to the value of the property and how likely it is to generate a positive or negative cash flow.
However, this calculation doesn’t consider expenses. That’s why many investors the net rental yield as a more accurate way of assessing returns.
* Net rental yield = [(Annual rental income – Annual expenses) / Total property cost] x 100
The net rental yield offers a clearer indication of whether you can afford an investment property, as it factors in your expenses. To work it out, you’ll need to calculate or estimate your total property costs and total annual expenses.
Total property costs could include:
- The purchase price/ market value
- Stamp duty
- Conveyancing fees
- Building and pest inspections
- Loan establishment fees
Total annual expenses may include:
- Property management fees
- Rates and water charges
- Strata levies (if applicable)
- Mortgage interest repayments.
Example: A property with a weekly rent of $500 ($26,000 a year), total property costs of $500,000 and annual expenses of $5000 would have a net rental yield of:
= [($26,000 – $5,000)/ $500,000] x 100 = 4.2%.
Calculating the net rental yield can be tricky, given you need to understand the costs of buying and running an investment property. If you’re stuck, our experienced accountants and advisors will help you crunch the numbers to ensure you make an informed decision.
Yields versus capital growth
While strong rental yields are great, it’s important to remember that they’re not necessarily the be-all and end-all of a property investment.
Some investors opt for a lower yield, but focus on buying property that is likely to experience capital growth. It all comes down to your investment strategy and goals.
Investing in property opens up opportunities to build long-term wealth, potentially benefit from a positive cash flow and/or reap certain tax benefits. However, you should always consult a qualified financial planner or tax consultant before proceeding.
If you’re considering an investment property purchase, Sinclair Wilson provides all the advice and expertise you need, in the one location; we have one of regional Victoria’s largest teams of accountants and tax advisors, who I work with every day to arrange the right finance option to suit our clients’ investment strategy and goals. My services include everything from calculating your borrowing power to finding you a competitive investment loan for your needs.
Contact us today about how we can make it happen.
This article provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. It does not constitute legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances. Subject to lenders terms and conditions, fees and charges and eligibility criteria apply.