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Achieving optimum rental returns on an investment property is the goal of every investor, and there are some simple, effective ways to ensure that you are getting the most from your asset without having to spend a fortune in the process.
Here, we look at how to calculate rental yields correctly and discuss ways for you to increase the income-earning potential of your investment property and maximise your profits.
Calculating rental yield
To work out your gross rental yield for a year, simply divide the annual rental income by the purchase price of the property and multiply by 100 to get a percentage.
Example: You purchased a property for $1,100,00 and lease it at $680/week.
680 x 52 = 35,360 annual rental income
(35,360/800,000) x 100 = 4.42% gross rental yield
Of course, owning an investment property incurs certain expenses, and you need to deduct these from your annual rental income to calculate your net rental yield (or profit) for a given year. To do this, add up your property-related expenses for a year and subtract that amount from the annual rental income before moving on to the next step.
Example: You bought a property for $800,000 and lease it at $680/week, and your annual property-related expenses come to $9,200.
680 x 52 = 35,360 annual rental income
35,360 - 9,200 = 26,160
(26,160/800,000) x 100 = 3.27% net rental yield
Although market conditions can vary enormously, a gross rental yield of between 3% and 5% is usually considered good for inner-city properties, while you’d expect to see slightly higher gross rental yields in regional areas.
Your best ally
There are two clear factors at play here - how much rent you charge and how much you spend on your investment property. Ideally, you want to maximise the former and minimise the latter, but it isn’t always that simple.
Setting your rent too high could mean vacancies, which will decimate your profits in next to no time. Not spending enough to keep good tenants happy will have a similar effect.
The secret is to understand your local market and know what attracts and retains the best tenants.
Your number one tool and most significant ally in this game is a top-performing property manager who will:
- secure the best tenants for you
- help you set a competitive, market-driven rent
- carry out regular inspections to catch any problems before they snowball
- recommend cost-effective ways to improve and add value to your rental property
Handing the day-to-day running of your investment property over to a top-notch property manager is a sensible decision, but there are also a few things you can do to improve the balance between your income and outgoings.
Increasing earnings, decrease expenses
Making small improvements that tenants in your area value will ensure your property is the one people want, minimising vacancies and bolstering your ability to ask for (and get) top-tier rent.
Think about things like:
- fresh paint and flooring
- pet-proofing your property
- refreshing the bathroom and kitchen
- adding or replacing valued appliances like dishwashers or microwaves
- providing outdoor amenities like barbecues, a shed or a deck
Having an attractive property will potentially increase your rental yield. Looking after it well will help lower your expenses.
For that reason, it’s really important to make sure that you catch any potential problems before they turn into costly maintenance jobs. Regular inspections are vital for this. Proactive maintenance is also a great idea, especially if your property has a garden that needs regular attention.
Check light fittings, flyscreens, gutters, door and window fasteners and other high-risk elements to make sure they are in good working order and replace them quickly if they are not.
It’s also a good idea to make sure that you are saving as much as you can on the larger financials. For example, if you are paying off a mortgage on the property, it might be time to shop around for a better deal. Talk to your accountant or financial advisor, too, to make sure that you are taking full advantage of any applicable tax deductions, including depreciation deductions.
These simple steps could save you thousands of dollars each year, and by teaming up with the expertise and skills of a great property manager, you could see significant increases in your investment profits in a relatively short time.
Other buying, selling and investing articles and resources
Guide to property investment success in NSW
Selling a house or apartment in NSW eBook
Buying a house or apartment in NSW eBook
Property investment in NSW FAQ’s
What is a property cycle and what drives a change?
Disclaimer
DiJones Real Estate, together with their directors, officers, employees and agents have used their best endeavours to ensure the information passed on in this document is accurate. However, you must make your own enquiries in relation to the information contained in this document and seek advice from your financial advisor, broker or accountant to ascertain its application to your circumstances.
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