Not all real estate investors understand the return on their rental.
Saturday, March 19, 2022, 9:50 a.m.
Barfoot & Thompson has put together a practical guide to real estate investing. Auckland’s largest rental agency says investing in property isn’t rocket science but does take a bit of work.
This is where understanding the potential returns on investment comes in. Although the goal of every real estate investor is to own a high-yielding property, which generates significant capital appreciation, a high rental yield and requires little maintenance, few achieve this.
Barfoot & Thompson says investors need to learn a few basics to help them understand returns.
Capital gain is the profit investors make when they sell an investment for a higher price than they paid.
Some people buy investment properties to make a long-term profit – as prices rise over time. This strategy may be associated with little or no profit in the short term, since expenses, such as mortgage payments and insurance, must also be taken into consideration.
The return comes from the rental money received from the tenants. This is the rent that a property can provide over a year, expressed as a percentage of its purchase price.
This is the income yield of an investment property before taking into account expenses, expenses or any rental vacancies. The gross return does not take interest rates into account.
Gross rental yield is commonly used when discussing yields because it is simple to calculate and allows investors to easily compare properties with different values and rental yields.
It is the income yield of an investment property after all expenses or other expenses, such as maintenance and insurance, have been incurred. The net return is sometimes referred to as the “rate of return”.
Although the gross rental yield is a simple calculation, it is important to remember that it does not take into account other factors, such as expenses, interest rates or periods of vacancy.
For example, a property may have a high rental yield but may also have high maintenance costs, which may make the rental yield low when considered.
High yield for less expensive areas
It is a general rule that yields are higher in cheaper areas. But the return must always be weighed against other factors such as maintenance, tenants, expenses and capital gain.
Calculation of gross rental yield
To calculate, take the annual rental income (weekly rent x 52 weeks) and divide by the value of the property. Then multiply that number by 100.
Property value $600,000 and expected rent $500 per week.
$26,000 ($500 x 52 weeks – annual rental income ÷ $600,000 (property value) x 100. Yield = 4.33%
Calculation of the net rental yield
To calculate, take the annual rental income and minus the annual expenses or loss of rental income from it. Then divide that number by the value of the property and multiply that number by 100.
Property value $600,000, expected rent $500 per week and expenses/losses $5,000. $26,000 ($500 x 52 weeks – annual rental income) – $5,000 (annual expenses/losses) ÷ $600,000 (property value) x 100. Return = 3.5%
Expenses or loss of rental income may include: purchase and transaction costs (purchase price of the property, legal and building inspection fees, possible start-up loan fees); annual charges such as vacancy costs (loss of rent and advertising); repairs and maintenance; property management fees; Assurance;
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