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What Is Rental Yield And Why Is It Important?

Investing in property is an incredible way to grow your wealth. What is actually being said here, is that if you can afford to hang onto your property for long enough to realise the capital growth, you will make money. Another classic property statement is, ‘property doubles every ten years’. Or ‘invest in property, you can’t go wrong’. Or, ‘you can never go too far wrong if you invest in property – people need homes’. All of these statements are true. I am often heard saying, ‘Know Your Numbers’. To make a great property investment decision, there are lots of numbers you need to know. One that is often ignored is the rental yield, yet it is a critical number required to forecast the annual cashflow associated with your property. While all of the above statements are true in regards to how property can perform and the benefit to the investor, if the cashflow is not sufficient, the capital growth will never be achieved. To understand that more, if the costs associated with holding a property are so great that they adversely affect your lifestyle, then there is a high likelihood that you will need to sell the property in order to protect your lifestyle. So, now for the magic number….to calculate the rental yield, you divide your annual rental income by the property value and then multiply it by 100 to get your yield percentage. For example, if your investment property costs you $700 000 and your expected weekly rental income is $650 per week, then the rental yield calculation is $650x52/$700 000x100 = $33 800/$700 000x100 = 0.482 which equals 4.82% yield. For this example, you can expect that 4.82% rental yield should cover the costs of holding the property if the interest payable is around 3% as it currently is in Australia. A really easy way to do this is to just take off a few zeros. If a property costs $700K then you should be getting around $700 per week in rent to cover costs. There is also a general rule of thumb, in residential property markets, in terms of how the rental yield relates to growth. If the yield is significantly below 5% then there is great likelihood that the property will experience high capital growth. Inversely, if the yield is above 5% then the growth is expected to be higher. For investors looking to rental yield potential as a deciding factor when purchasing a property, the Commonwealth Bank of Australia advised to aim for 5.5 per cent or higher. It’s so important to understand all of the numbers related to your property investment decision. These are just a couple that many investors miss when deciding on the best property for their investment strategy. For your next property investment, make sure you seek out the advice of a professional who understands the important numbers required to assess the performance potential of a property. Preferably someone with a combination of real estate and finance qualifications, like the team at Calla Property. Not only can we help you work out what your property strategy is, we can recommend the best property based on a robust research methodology and the numbers involved to ensure you’ll be able to hang onto the property while the capital is growing. What are you waiting for? Oh, and our service comes at no cost to you. www.callaproperty.com.au

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