Successful property investors are known for their finesse around choosing the right properties to buy and sell - with ever decision made with the view of growing their wealth.
Here’s the first of the best insights into Property Investing!
Over the next few posts, we will look at a few keys areas that most investors focus on to ensure that make good buying decisions.
This week we’ll start off with the basics of investing - Rental Yield
Put simply, investors are looking for properties they can buy and rent out - where the rent ideally exceeds their costs (and then some).
Formula for Calculating Rental Yield:
Rental yield (%) = (Annual rental income-Annual Costs) / Sale Price of Property) x 100
So for example, a $330,000 home generates $350 a week in rent, has yearly rates of $1200, the rental yield would be.
[($350x52)-$1200]/330000) x 100 = 5.2% Rental Yield.
This is also known as Net Rental Yield. You should also consider other costs, such as insurance, regular maintenance costs, etc if applicable.
To be honest…. most people just calculate without considering annual costs.
Why does this matter when investing?
Here is a quick calculation that hopefully helps.
$330,000 - House Sale Price
$264,000 - Mortgage Amount (after 20% deposit)
$12,672 - Interest payable on the mortgage each year (based on no repayments) at 4.8% pa
$17,000 - Net Rental Income (calculated above)
$4,328 - Profit (Income vs Interest)
Therefore if your Net Rental Yield exceeds your Mortgage interest rate, your rental income will cover the mortgage interest and then some more.
In layman’s terms, your tenant will be paying the interest on the mortgage, and even helping with some repayments along the way.
If your tenant’s rent is covering your interest, your $264,000 loan technically becomes ‘interest-free’
All while your property is also gaining capital value through renovation / market appreciation / etc - this we will cover in the next few blogs.
I plan on living in my house…. So what can we learn from this?
Knowing this calculation, you can ask your real estate agent for a rental appraisal, they should have one - if not you can ask a local property management company to give you their opinion.
Even if you are planning on living in the house you buy, you may want to consider the future of your real estate investments - when you decide to move out, if the rental yield is favorable - then why not just rent it out and buy somewhere else?
Also by knowing the ideal rental yield, you can reverse calculate what price you should offer on the property.