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.
