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For first-time investors, one of the key issues they will have to determine is the rental return of the property that they want to purchase.
The rental return is the amount of rent landlords will receive on an annual basis relative to the purchase price of the property.
This will help to determine whether investors can afford to hold the property, taking into account interest rates and their own personal income.
Rental returns are important in the current Australian property market as there have been falls in recent returns during recent years in a number of capital cities due to several factors.
In capital cities such as Sydney and Melbourne, they 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 the fact of an oversupply of rental properties pushing down weekly rents.
Rental yields vary widely between capital cities, with Melbourne now having the lowest rental yield of just 3.3 per cent and Darwin the highest at 5.6 per cent.
For those new to the property investment market, determining these rental returns is of critical importance (especially for those planning to buy interstate).
One simple technique that can be used to help clients determine 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 the 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 $500,000 = 0.0052; multiply this by 100 = 5.2 per cent. This means that, at the end of the year, the landlord has received a 5.2 per cent gross return on their $500,000 purchase price. If you do this for each of your clients' alternative property choices, then they 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, it will help determine the long-term profitability of the investment property as well as the ability of the investor to purchase additional properties.
ABOUT THE AUTHOR
Shane Kempton
Shane Kempton is the chief executive of Professionals Real Estate. He is an experienced, well-respected real estate identity and chief executive committed to effective development of teams. His reputation is built on honesty, integrity, confidentiality and ethics, all highly valued traits of this influential leader.
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