When it comes to calculating the value of an investment property one thing you will be hearing time and time again is talk about yield. Simply put, the yield is what you expect to get back. Your future income.
Typically, the yield is measured as an annual percentage so you can easily compare your yearly ongoing costs (rates, insurance, maintenance etc.) and any incurred interest against your expected returns to get your profit figures.
Don't get returns and yield mixed up. Returns are calculated by looking into the history of the property using hard facts and figures, while yield relies on estimations, predictions and room for error for how the future might play out. Returns are easy to determine because all the expenses and income are final and complete.
Different types of investment properties offer different financial strengths. Some have a low yield but high capital gain, meaning that the land will be very valuable later on. In these cases, a low return may be worthwhile overall, especially if the investor does not have to rely on property income to make loan repayments. Other properties might have low yield (or zero yield to start with) but are worthwhile for their infrastructure potential. Capital gain is not factored into yield, the yield is only the money earned directly from owning and running the asset, not selling it.
Usually, though, most investment properties are aimed at high yield, and this in most cases will be the deciding factor when it comes to an investment property purchase.
You need to be careful that you factor in all the expenses because these can be high, taking a huge cut from your income. This is especially true in an apartment type setting or shopping centre where there are compulsory fees. If the calculations you have are for gross rental yield you need to be aware that this doesn't take any expenses into account.
Look out for initial purchasing fees. Purchasing a property comes with fees, stamp duty and administration costs that you need to factor as part of your running expenses. Even though these costs are one-off they are still are a large contributor to your expenses and will be am important deduction to accurately measure your net yield.
Known expenses. Your set up and administration costs will be part of your known expenses. They have fixed prices and come into play at fixed times during your ownership. Council rates, property management fees, ongoing maintenance for gardens and building care, insurance and property fees are all easy to calculate and plot out over the year.
Some of the expenses you'll be facing will be unknowns. How much time the property will stand vacant, repairs and service replacements, like water heaters or emergency plumbers, how often you will need to pay advertising fees, or if you'll need to replace the locks. These costs will be unknown but estimate them as best as you can. You will also need to assume in your calculations that rates and service costs will increase year to year.
When talking to your property agent be sure to get all the figures on both the return and yield. As well as the numbers themselves, you need to have an understanding of where these figures have come from. Across what periods? Are they calculated on an annual basis?
Hear the term hard yield or soft yield while out researching? Yields are said to be hardening when the yield is dropping back or reducing. This is something that happens when property prices increase. A softening yield is a term used when the yield increases.
It is best to look at an annual yield. To do this:
A: Determine the annual rental income (weekly rental x 52). Deduct from this an estimated amount of lost rent (vacancy periods) and all expenses associated with owning a property for one year.
B: Divide total A by property value
C: Multiply total B by 100
For example. You buy a property for $495,000 and rent it out for $386 a week. You factor the yearly expenses to be around $3,000.
A: ($386 x 52) $20,072 – $3,000 = 17,072
B: 17,072 / 495,000 = 0.03448
This is your net yield.
For your gross yield, you don't factor in the expenses.
A: Multiply the weekly rental by 52 to get the annual rental
B: Divide the annual rental by the property value
C: Times the total by 100
Using the same example above
B: /495,000 = 0.0405
C: Gross yield = 4.05%
The higher the yield, the higher the percentage. Just remember, this doesn't mean you will get a great capital gain, just because the yield is high, in fact, with most investments you have to choose one or the other, you can rarely bank on both. Please take into account that the right property management can have a big impact on sustainable rental returns so there are plenty of factors to weigh up and consider as part of your investment plan.
Need a conveyancer in Albury? Contact us now to set up an appointment.
When it comes to managing a residential investment property, like many aspects of modern living, you have the option to pay for a professional to do the work for you, or roll up your sleeves and do-it-yourself, with property management, this is known as a private rental.
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