What do investors mean when they talk about "rate of return"?
Rate of return is a measure of profitability; it measures the annual income that an investment property will generate vs. the total cost of purchasing that property.
This is measured as a percentage figure.
For example:
If you purchased a property for $200,000 and rented it out for $200 p.w. you would be looking at an annual gross rate of return of 5.2% of your original purchase price.
Purchase cost - $200,000
Rental Income - $10,400 p.a. ($10,400 / 52 weeks = $200 p.w. rent)
$10,400 / $200,000 x 100 = 5.2%
Your annual gross income from the property is therefore 5.2% of what you have invested.
Things to keep in mind
You should always keep the following things in mind when determining your rate of return. These extra expenses should be subtracted from your gross rental income & they will effect the size of your return.
- Vacancy rate - your property could be vacant for a number of weeks if a tenant leaves and you need to find another one. Be conservative and allow 2-4 weeks for this.
- Maintenance - plumbing, electrics, roofs etc will all need repair from time to time. It's a good ideda to allow a certain amount of money for this each year.
- Management fees - it's a good idea to employ an agent to manage your property. Agents will arrange maintenance, find suitable tenants, reveiw rents and conduct inspections. There will be a fee for this service. Remember, you always get what you pay for.
- Insurance - insurance against damage, loss of rent and injury to tenants is a must. Talk to your solcitor and/or your chosen agent.
- Possible legal costs
- Annual council rates and land tax expenses
Special things to remember
- Have a good lease drawn up - your agent and/or your solicitor will ensure this is done properly.
- Make sure your lease protects you, your property and your income. It should also specify any extra "rules" you would like your tenant/s to abide by. Agents will advise you on this.
- Rent reveiws - these are rental increases over time. Increases in rent are necessary as inflation erodes the value of the dollar. You'll want to protect your income against this.
- Pick a property manager with experience and results. Your investment is too big to be mis-managed. Make sure you're comfortable with your chosen agent.
- If an agent is charging more than another there is usually a very good reason for it - they're worth it and have a very good track record.
Some of these tasks seem daunting and complicated. In reality a good property management agent will take all the stress out of being a landlord. The most important thing for you to do is consider all of your possible costs when buying a rental property. If you factor these expenses in from the start you won't have any surprises down the track.
Property is one of the most popular investment strategies in Australia and can help you create wealth. Immediate income whilst important isn't everything. Remember, as the years go by your investment property should increase in capital value. This capital value will be worth a great deal to you in the future, it will give you the option to borrow more or sell for an immediate cash return.
If you're looking to invest don't worry. Do your sums, get good advice and go for it!
For advice buying or selling - Halliwell First National Real Estate
http://www.halliwellfn.com.au/
Alan Halliwell - Director
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