If you are a first-time investor looking to enter the current market, rental return should be at the top of your considerations. Here's how you can calculate whether your investment purchase will stack up.
If you are a first-time investor, one of the key issues you will have to determine is the rental return of the property that you want to purchase.
The rental return is the amount of rent you will receive on an annual basis relative to the purchase price of the property.
That will help to determine whether you can afford to hold the property taking into account interest rates and your own personal income.
Rental returns are very important in the current Australian property market as there have been falls in returns during recent years in a number of capital cities due to a number of factors.
In some capital cities such as Sydney and Melbourne, returns have been falling because rents have not increased at the same rate as rises in property prices.
However, in Perth rental returns have been falling due to an oversupply of rental properties pushing down weekly rents.
Rental yields now vary widely between capital cities with Melbourne having the lowest rental yield of just 3.3 per cent and Darwin the highest at 5.6 per cent.
If you are now buying to the property investment market, then determining these rental returns is of critical importance especially if you plan to buy interstate.
One simple technique that can be used in determining this rate of return is to take the weekly-anticipated rent, multiply this figure by 52 to get the income for the year and then divide that sum by the purchase price.
The final figure will be your rent return. Multiply this by 100 if you wish to express this as a percentage. For example, $500 per week rent on a $500,000 property comes back at 5.2 per cent rent return. The sum is worked out as follows.
$500 x 52 = $26,000, divide this by $100,000 = 0.0052, multiply this by 100 = 5.2 per cent. That is at the end of the year you have received back 5.2 per cent gross return on your $100,000 purchase price. If you do this for each of your alternative property choices, then the investor will quickly see which one is the best investment.
Because the rental return is the cash flow that a rental property is able to deliver the investor and it will help determine the long-term profitability of the investment property as well as the ability of the investor to purchase additional properties.