Understanding anticipated yield on an investment property

The rental crisis sparked by thousands of overseas students and workers returning home because of the pandemic has been turned on its head, creating fresh opportunities for experienced and first-time investors.

Demand now far outstrips supply, according to the latest figures revealed by REA Group's PropTrack rental report.

We're seeing a 37% rise in demand for rental properties against a 24% drop in availability compared with last March's figures. Every capital city has a record level of rental-shortage pain.

REA pins the cause on investors who've sold rentals at record-high prices, effectively taking their properties off the rental market.

Property researcher CoreLogic says historical yield averages of 5-6% slipped to 3.5% last year, which may explain the exodus of landlords.

But rising rents change everything.

As an experienced agency, we can see that now could be a great time to get back into the market. Average rents are up 4.7% compared with a year ago, and prices are already cooling as mortgage rates increase.

A question you'll need to answer in this new situation is the anticipated yield; that is, the future annual income compared with the total cost of your investment.

Below is a basic explanation of the yield concept so you can be more informed in discussions with your financial adviser.

Gross yield

This is the income you receive before deducting your expenses. These include stamp duty, legal fees, and other expenses associated with the purchase, plus property management fees, advertising costs for tenants, strata fees and annual maintenance bills.

Follow these 3 easy steps to calculate the yield.

1. Sum up your total annual rent that the property would earn.

2. Divide your annual rent by the value of the property – the purchase price.

3. Multiply that figure by 100 to get the percentage of your gross rental yield.

For example:

$25,000 (rent earnings)

Divided by $500,000 (property value)

Multiply by 100

Equals 5%

Net yield

After subtracting all your expenses (stamp duty, legal fees, and other expenses associated with the purchase, plus property management fees, advertising costs for tenants, strata fees and annual maintenance bills) from your future income, you're left with your net yield. You'll be able to see whether you'll make a profit or a loss, which plays well if you want to negative-gear the property for other tax reasons.

Your return

The big difference compared with net yield is that your return calculation includes a prospective capital gain based on past performance.

Please consult with a professional adviser for information about tax benefits, cash-flow implications and how a purchase might align with your wealth goals. This information is general only and does not constitute professional advice. You should always seek professional advice concerning your particular circumstances before acting.

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