Buying investment properties is a great way to generate additional income streams in the long term. The trick is to ensure that your rental price generates an amount of rental income that makes the project worthwhile. If you peg it too high, you may battle to find a tenant, and if you set it too low, you may not be able to offset the expenses and come out comfortably in the black.
Property investment advisors can offer the best advice to help you set the optimum rental prices to get the best from your investment property. Here are some basic guidelines to get you started.
Know What Your Expenses Are
When calculating the ideal amount of rental income your property can generate begins with understanding what the expenses associated with the property are. Your property investment advisor will tell you that costs will include all or some of the following:
- Repayments on your mortgage loan
- Property income related taxes
- Utilities and services paid for by the owner (water or garden maintenance)
- Regular and emergency maintenance expenses
- Provision for long-term maintenance projects
Factors That Influence Rental Prices
Multiple factors will directly influence the rent you can reasonably ask for your property. Property investment advisors will tell you that these are some of the factors that influence rental prices:
- Location and proximity to services and amenities - more desirable areas will garner higher rental incomes, especially where closer to relevant services like schools, shops, malls and healthcare.
- Safety and security - properties in areas perceived to be safer will command higher rentals.
- Demand - more desirable areas will be more in demand, further pushing up the rental prices.
- The age and state of repair of the property will affect the rental income.
- Features and facilities offered by the property will directly influence the rental; for example, commercial properties with onsite parking will be more popular. Residential properties with access to pools, air-conditioning, and underfloor heating will attract higher rental prices.
Calculating The Rental Income
The basic equation for calculating the rental return is Gross Yield
This is a high level calculation of the rental return on a property. It is calculated as
Annual Rent (Weekly Rent x 52 weeks) / Property Value = Gross Yield
It’s a quick assessment of the yield you will get. A more accurate assessment is the Net Yield calculation which is the income you get after expenses divided by the property value.
(Annual Rent - Annual Expenses) / Property Value = Net Yield
A positive net yield will mean you have a cashflow positive property prior to taxes. However it’s important to note that with the removal of interest deductibility on existing rental properties a positive pre-taxnet yield can turn to negative when factoring in taxes.
Contact Simpler today to find out how we can help you with your investment property requirements. Our experienced property investment advisors are available to give the best advice and set you on the path to investment property success.