Warwick Brookes – Buyers Advocate
Today I’ll be discussing the exciting world of capital and rental yields when looking at investment properties.
When purchasing property, it’s essential that you select the right property with a history you can refer to and also have an understanding of how the different yields work.
Take Hawthorn for example, in the same street you might find one property with an average of seven to nine percent capital growth per annum over a ten-year period, and yet another property in the same street may have only had a three to four percent growth rate. Choosing the wrong property can therefore result in a significant gap in your earning potential on the investment.
Many investors talk about the yield of an investment property. However, it is important to understand the difference between gross yield before costs and net yield after costs. Rental yield is usually calculated as the annual rent of a property as a percentage of its capital value. When looking at the net rental yields, the costs and fees associated before purchasing a property must also be taken into consideration. This is something to be wary of when you’re investing in real estate and talking to real estate agents. If you decide not to engage a buyer’s advocate to guide you through the process, you will find that you may fall into the trap of not identifying hidden costs.
When calculating rental yields, ensure you include all appropriate costs so you can get a true reflection of the return on investment. These costs can include management fees, rates and assorted other items. It is also important to understand the annualised return of a property. To give an example, let’s say a property in the eastern suburbs with a purchase price of seven hundred thousand has a gross yield of 4 per cent. This is a typical investment in this area of Melbourne and is generally considered a good yield. In another example, you’re looking to grow your property portfolio and you find a property with a 3 per cent yield which on paper doesn’t look that desirable. However, if that property experiences an average of seven percent annual growth rate over 15 years, you produce an annualised return of capital growth plus yield of ten percent, so that probably now looks much more attractive.
What you don’t want to do is buy a property with a 4 percent yield and only a three per cent annual capital growth rate. When purchasing an investment property at Longview, we provide our clients with a full breakdown of all yields over extended periods of time, showing a historical pattern of why the property has worked in the past.
If you’d like us to help you out, give me a call on 0412 340 611
