A Property blog by Paul Bennion.
One of the most significant trends in the Australian property market over the past 18 months has been falling rental returns which in some capital cities are now the lowest on record.
Melbourne currently has the lowest rental yield in Australia (3.0%), followed by Sydney (3.2%) and Perth (3.9%).
If you are a first time investor, then 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.
If you are new to the property investment market, then determining these rental returns is of critical importance especially if you plan to buy Inter State.
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% 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%. That is at the end of the year you have received back 5.2% gross return on your $500,000 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.
First time investors should also understand that even in an environment of low rental returns, they can maximize their cash flow by fully claiming their tax depreciation benefits.
By calculating depreciation, these can amount to up to 60% of the total purchase price of the property and the cost of a tax depreciation report (around $600) is fully tax deductible.