How To Work Out Your Return On Your Investment Property
When buying an investment property, it is essential to understand the profitability of the investment before diving in. Calculating the returns on investment properties is crucial to make informed decisions. Knowing the gross rental yield, net rental yield, and capital growth rate can help in determining the profitability of the property. In this blog article, we will discuss the methods of calculating the returns on investment properties.
How to work out your return on investment
1. Calculate the gross rental yield - This is the rental income expressed as a percentage of the property's value. To calculate the gross rental yield, divide the annual rental income by the property value and multiply by 100. For example, if the annual rental income is $20,000 and the property value is $400,000, the gross rental yield is 5%.
2. Deduct expenses - To calculate the net rental yield, estimate and deduct the operating expenses from the annual rental income. Operating expenses may include property management fees, insurance, property maintenance, repairs, financing costs and property taxes. For example, if the annual rental income is $20,000 and the operating expenses are $5,000, the net rental yield is 3.75%.
3. Calculate the capital growth rate - Predicting future capital growth is challenging and there is no guarantee, as there is no exact science. The capital growth rate is the rate at which the property's value increases over time. To calculate the capital growth rate, you divide the difference between the property's current value and purchase price by the purchase price and multiply by 100. For example, if the property was purchased for $500,000 and its current value is $600,000, the capital growth rate is 20%.
Once you have all the above, you can calculate the total return on investment by adding the net rental yield and capital growth rate. For example, if the net rental yield is 3.75% and the capital growth rate is 20%, the total return on investment is 23.75%.
Remember, predicting future capital growth is challenging, and there is no exact science. Therefore, it's essential to consider multiple factors and consult with experts before making any investment decisions.
MIX Property Group would be more than happy to assist with any questions regarding investment property purchasing and management, please contact us today if we can help further.
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