Hi, Sam here from Templeton Property and today we’re going to briefly discuss – How to work out a Gross Rental Return.
The gross rental return or gross yield is a very useful figure in understanding an investment property quickly. When we are out there looking at investment properties as a Brisbane Buyers Agent we are looking at a lot of properties, the gross rental return is a great figure to get an overview of how the rental income of one property compares to the value of another and also how likely it is going to generate a positive cash flow.
Its also easy to calculate on the run.
Hi, Sam here from Templeton Property and today we’re going to briefly discuss – What is the Gross Rental Return of a Property.
The Gross Rental Return is what we calculate when we’re looking at an investment property for a client. We might be in the car, we might be sitting in front of our computer, and we know what the asking price or the potential sale price of the property is. We then find out what the rental appraisal is and we can very quickly, using this quick calculation, work out what the Gross Rental Return of the property. It is very different than the net rental return, but we can discuss that at another time.
What we do is take the purchase price, so we might look at the asking price and assess the likely purchase price and based on this price, we factor in what the stamp duty is, which is quite costly throughout Australia, cost for building pest inspection, conveyancing costs, and any initial improvements for example you might put in an air conditioner, a new stove top, some minor painting and maintenance and so forth. That gives us the total purchase cost at the origination of the purchase.
In this example here, there’s almost $25,000 of extra costs so that’s the baseline that we work the gross rental return on. We then look at the realistic appraised rental for the property. In this case we’ll work on $500 a week, times by the number of weeks, gives us the gross rental income. In this case it’s $26,000 per annum. $26,000 divided by the total amalgamated purchase price gives us 0.0453, times that by a hundred, gives us the gross rental return of 4.53%. This is actually a pretty good return in Brisbane for a detached house. If it was a unit or a town house we’d be getting up towards the 5 – 5.5% for quality product. Inner city high end houses are actually quite a bit lower than the 4.53%, they are sitting at more the 3.5% plus for those inner city properties.
Example Gross Rental Return Calculation:
Purchase Price: $550,000
Stamp Duty: $17,775
Pest & Building: $600
TOTAL COST: $573,325
Annual Rent: $26,000
($500 per week X 52 = $26,000)
$26,000 / $573,325 = .0453 X 100%
GROSS RENTAL YIELD: 4.53%
To calculate the net rental yield, we include the expenses associated with the property. In this case we know the annual income is $26,000, but then we take it the next step and we analyze all the additional costs involved, such as the property management, the maintenance, the vacancy period, land tax may be applicable, you can also factor in interest as well as depreciation and so forth, to strip the gross rental yield back to a net, which is usually significantly lower than the gross rental yield.
I hope that helps. Have a great day and if we can help, just send us a message or give us a call. Thanks, talk soon.
Sam Price – Templeton Property
At Templeton Property we go above and beyond to secure the best outcomes for our clients. Discover more about we can assist you by calling us today on 07 3368 1988 or Sam Price directly on 0418 159 993 to discuss your needs.