If you are an investor, the magic formula for any investment property is high rental yield, coupled with excellent capital gain prospects. Some investors choose one over the other, depending on how quickly they plan to sell their investment property.
If you are thinking of investing, it is worth understanding what rental yield is and how you can calculate it, and then looking at ways you can maximise it for your financial benefit.
In short, the yield is rental income calculated as a percentage of the purchase price of the investment property. It is a calculation of the annual rental. A general rule for rental yield is that anything over 5 percent is a good start.
Be aware that there is gross yield and net yield.
Gross yield is calculated by multiplying weekly rent by 52 weeks, dividing by the property’s value and then multiplied by 100 to reveal the yield as a percentage.
Net yield takes into account the annual expenses on the property such as rates, water, insurance, property management fees, repairs and so on. Net yield is probably a more accurate calculator insofar as using it for tax purposes and understanding whether the investment property is financially beneficial for you. To calculate net yield, take the annual rental income (see above) and then subtract your yearly expenses before dividing by the property value and multiplying by 100 to reveal the percentage.
If your calculations come short of the magic 5 percent, there are ways you can increase your rental yield without too much additional expense:
• Give the tenants something extra - This could include internet or Pay TV or even an additional car space, or free parking (especially useful in CBD properties)
• Lease your property fully furnished - generally, this is better suited to metro properties where lease terms may be a bit shorter, or interstate and overseas professionals are looking for a city base, but it is also useful if your property is targeted at young renters moving out of home for the first time.
• Install solar energy - while this may mean some financial outlay, you can charge tenants more due to their reduced or eliminated power bills
• Reconfigure your property to add a bedroom - depending on the layout and design of your place, you could convert a dining or additional living space into an extra bedroom, increasing its rental value.
• Add an extra bathroom - adding a bathroom (usually in the laundry) can add rental income but also increase the value of your property. If your budget or space doesn’t stretch to a full bathroom, just add the extra toilet.
• Add split system air conditioning - Most rental properties don’t provide additional luxuries, so if yours is in an area with extremes in temperatures, an air-conditioner will put you ahead of the pack and command more rent.
• Reduce your property management fees - Managing your rental property is not tricky, so by cutting out property management fees, doing it yourself, you will increase net rental yield. Property management fees can equate to a significant proportion of your annual expenses, and when you consider the fairly limited role property managers have, it really is money for jam, and just as easy to manage yourself.
For more information please feel free to call one of our private property specialists today on 1300 289 697.