Imagine getting nothing in return for investing hundreds of thousands of dollars.
That may sound unthinkable. However, it can easily happen if you do not understand how property yield works.
Property yield is one of the most important factors when making decisions about investment properties. Here’s how to calculate this crucial number!
For those buying investment properties, understanding what yield is and how it works is the best way to choose investments.
What is property yield?
The basic definition of a yield is that it estimates the income of your investment. It is calculated using factors such as cost and market value. Property yield is completely separate from capital gains on properties.
Terms to Know
Gross yield serves as an estimate of investment income before expenses are deducted. Because of this, there is often a significant difference between the gross yield amount and net yield.
The net yield represents investment income after expenses have been deducted. Such expenses include inspections, marketing, legal fees, and more. In most cases, you will have to estimate these expenses before making a purchase.
Average yield is the average return of other properties in the area. This average may not be representative of the total return your own property will bring. However, it is still a valuable tool for scouting potential investment properties.
An all-risks yield estimates the yield based on the risks of a fluid investment market. Such a yield is especially important for those making commercial property investments. This estimate is typically more conservative than others.
Total return represents the overall financial gain of a property over a set period of time. This estimate includes capital gains.
Property Yield vs. Capital Values
Some property investors wonder if they should focus more on the yield of a property or on capital values. In most cases, property yield provides a better estimate for returns.
Capital value is a limited estimate because it relies on comparing similar investments in similar areas. It is easier to compare property yield across a range of properties. That is generally a better approach for making the wisest investments possible.
Calculating Gross Yield
The act of calculating property yield is relatively simple. Knowing what kind of yield estimate you want determines the kind of calculation you perform.
Calculate gross yield by taking annual rental income and dividing it by the property value, then multiply by one hundred.
For example, a $500,000 home may rent for $400 per week. Multiply $400 by fifty-two. Take the amount ($20,800) and divide by $500,000.
This gives you a gross yield of 4.16%.
Calculating Net Yield
Net yield is more difficult to calculate. There are more variables involved. You must have a solid estimate of yearly expenses and fees.
Calculate net yield by multiplying the monthly rent by fifty-two weeks. Then, subtract the amount of any anticipated costs and fees. Finally, divide by the property value and then multiply that by one hundred.
For example, the $500,000 home that rents for $400 per week may have $3,000 per year in expenses. Multiply $400 by fifty-two.
Take the amount ($20,800), subtract $3,000 ($17,800), and divide by the property value. Multiply this amount by one hundred. This provides a net yield of 3.56%.
Calculating the estimated yield and value of a property is relatively simple. However, other factors may increase or decrease the value of a property.
“Covenant strength” is a special term to describe how reliable the tenant of a rental property is. A property has a higher covenant strength if the tenant is financially stable and has a reliable rental history.
In addition to the calculated value of a home, a high covenant strength represents a reduced risk to any investor. It is important to understand that risk when buying a new property or when you are seeking to sell one of your own properties.
Those seeking to eventually rent their properties out should pay attention to void periods. These are the periods during the year or over several years that a property has been without a tenant.
Researching void periods allows you to estimate how often your property will actually have a tenant. The overall value of a property is meaningless if it is almost never occupied by tenants.
When researching similar homes of similar costs, choosing the one with fewer void periods usually represents a sounder investment.
Why Invest in Property?
Those who are new to investing may wonder why they should invest in property rather than more traditional investments. The primary reason is that property has historically been a much safer investment.
The housing market may experience minor “ups” and “downs,” and there are occasional larger disruptions. Overall, properties retain their value for many years, and there will only be more tenants for your investment properties as time goes on.
There are many potential properties to invest in. It can be difficult to correctly estimate property yield and other financial factors regarding the property.
The best bet for anyone seeking to enter the world of property investment is to seek out experts in your area. You can determine the quality of professional services by researching the testimonials that previous customers have offered.
The Bottom Line
Before investing in property, you need to find market experts you can trust. Hyland Investments is a name that Australians trust to find the best investments and to help grow the wealth of their clients.
Many who are new to investment look to Hyland to help with things like calculating property yield. Often, those clients continue their relationship with Hyland for decades. This is because Hyland Investments helps clients to retire with both dignity and comfort.
Hyland provides every client with individualized assistance and professional care. Those who wish to grow their wealth through property investment can look forward to developing a mutually beneficial, long-term relationship with Hyland.
To discover how they can make your wealth grow through property investment, contact Hyland today!