How to Calculate Property Investment Returns
All types of investment involve calculated risk-taking and effective financial management. Making an investment without understanding potential returns is not feasible. This is particularly true in property investment.
Property is a tangible asset that generates wealth through rental income, tax incentives, and capital growth, so it's crucial to know how to calculate the true return on property investments. To do this, you must understand key factors such as net yield, capital gain, holding costs, and cash flow.
Net Yield
Net yield, or rate of return, is the return on your investment after deducting expenses. It accounts for the property's purchase price or market value, expenses, and rental income and is expressed as a percentage. Net yield can be tricky to calculate, as expenses can vary.
Capital Gain
Capital gain is the profit made from selling an investment property. It’s the difference between the purchase price (cost base) and the selling price. Capital gains tax (CGT) is included in your assessable income and taxed at your marginal rate.
Holding Costs
Holding costs refer to the ongoing expenses associated with owning an investment property. These costs may include property management fees, strata fees, insurance, repairs, maintenance, mortgage repayments, and council rates. Many investors focus on the purchase price, but overlooking holding costs can negatively impact an investment strategy.
Cash Flow
Cash flow represents the movement of money into and out of an investment property. Positive cash flow means your investment generates more money than it costs to maintain, while negative cash flow means your holding costs exceed your profits.
How to Calculate Property Investment Return
Now that you're familiar with the key principles of property investing, you can begin calculating your property investment return. The return on investment (ROI) is the percentage of money returned to you after deducting holding costs.
Start by calculating or estimating the property's annual rental income. For instance, if you purchased a 10-year-old property for $450,000 and earn $530 in weekly rental income, your annual rental income would be $27,560.
Next, calculate your holding costs. Consider expenses such as:
Property management fees
Insurance premiums
Council rates
Land and water rates
Mortgage interest
Repairs and maintenance
For a property of this price, typical expenses may total around $38,200. Subtracting holding costs from rental income will give you your return: $27,560 – $38,200 = -$10,640
This shows a negative return, meaning the property is negatively geared.
However, you can claim your loss on taxes at the end of the financial year and claim depreciation deductions to lower your taxable income, which can help improve your cash flow.
