FAQ 114 What numbers should I look at when considering Income Properties?
When looking at Income producing properties we don’t really need to go into a lot of fancy number juggling. There are only a few numbers that tell you all about how any property will perform from an income perspective. What are these numbers?
- VALUATION OR PURCHASE PRICE ($)
- GROSS RENTAL YIELD (%)
- NET RENTAL YIELD (%)
- LOAN LVR (%)
- LOAN INTEREST RATE (%)
First let’s look at Gross Rental Yield. This is the % of the value that is returned in rent that the tenant pays you.
An example would be a $700k property with a Gross Rental Yield of 5% would return a GROSS RENT of $35k per year.
Now turning our attention to Net Rental Yield. This is the % of the value that is left over after using the rent to pay all expenses ( not interest ) associated with the property.
An example would be a $700k property with a Net Rental Yield of 3% would return a NET RENT of $21k per year.
From these 2 figures we can work out that the EXPENSES are $14k per year ($35k minus $21k) or using the yield percentage figures, 5 minus 3 divided by 5 then multipled by 100 = 40% of the GROSS RENT. Work it out for yourself – 40% of $35k equals $14k!
If we had no loans associated with this property then our NET RENT would equal our CASH FLOW. Please be aware that deposits, stamp duties and strategies funded from redraw accounts secured against other properties are still loans which affect the real LVR of your investment property and thus affect greatly the overall CASH FLOW
If we had an 80% LVR loan with an interest rate of 4.6% then our borrowing cost ( interest only) would be $700k x 80% = $560k
$560k x 4.6% = $25,760
Under these circumstances our CASH FLOW would be $21,000 minus $25,760 – a NEGATIVE CASH FLOW of -$4760
If we had an 116% LVR loan (80% primary loan plus 36% secondary loan to service deposit, stamp duty and reno strategy cost) with an interest rate of 4.6% then our borrowing cost ( interest only) would be $700k x 116% = $812k $812k x 4.6% = $37,352
Under these circumstances our CASH FLOW would be $21,000 minus $37,352 – a NEGATIVE CASH FLOW of -$16,352
Responses