One of the most important measures of a property’s value is the amount of rental income that it can generate.
A good way to determine if a particular property is generating strong rental income is by looking at the rental yield.
Here is an example of a rental yield calculation (based on the December 2013 RP Data Property update) below:
a) The median rent for a unit in Brisbane is currently $409 per week. This equates to $21,268 over a year.
b) The value of this property is $386,690.
c) $21,268 in annual rent is 5.50% of the $386,690 property value. 5.50% p.a. is the Rental Yield.
What makes this current market so enticing for investors is that rental income is often higher than the interest cost of the mortgage.
Take the above example in Brisbane.
a) A person takes out a home loan for $367,355 to purchase a unit for $386,690 (the home loan is 95% of the unit’s purchase price).
b) The annual interest only payment on this loan with a 3 year fixed rate of 4.89% p.a. is $17,963.
c) The current annual rental income for this property would be $21,268. You do the math.
There are of course other risks, costs and benefits associated with owning an investment property, however, this situation where mortgage interest expense is less than rental income is quite rare.
Now you can see why people are so keen to invest. If an investment property has little impact on your weekly budget then it can be an attractive proposition.
If you would like to conduct a more thorough review of your investment options please give us a call.
Note: Don’t forget your Superannuation savings. If it makes sense for you to set up a self managed superannuation fund then buying an investment property could be well within your reach.
Michael Daniels, B.Com
Smartline Personal Mortgage Advisers
State Manager NSW & ACT
DISCLAIMER: The information contained in this article is correct at the time of publishing and is subject to change. It is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, Smartline recommends that you consider whether it is appropriate for your circumstances. Smartline recommends that you seek independent legal, financial, and taxation advice before acting on any information in this article.