How To Estimate Your Rental Yield

No matter what investment strategy you use, calculating the potential rental return on an investment property is a key step in the purchasing decision process. The rental yield is an important indicator of how a property is likely to perform and the cash flow it will generate. So, whether you’re using a positive or negative gearing strategy, it’s a calculation that allows you to quickly decide if the numbers will stack up for you, and if you can afford to service a loan on a particular property.

In this article, we explain how to estimate the rental yield – an important first step before deciding whether an investment property is the right one for you. It should be noted that this is a general guide only – you should consult a professional accountant and/or financial planner before proceeding with any investment or tax strategy.

So, what exactly is rental yield?

When buying an investment property, investors typically consider two key factors. Capital growth, or how much a property is likely to increase in value over time, and rental yield.

The rental yield is the rental income of a property, expressed as a percentage of its value. It can be calculated in gross terms (before expenses), or as a net percentage (with expenses factored in).

* Gross rental yield = (Annual rental income / Property value) x 100
Example: A property with a market value of $500,000 that returns a weekly rent of $500, or $26,000 a year ($500 x 52), would have a potential gross rental yield of: ($26,000/ $500,000) x 100 = 5.2%.

Sometimes gross rental yields are calculated as a percentage of the original purchase price, rather than the market value. This can affect the outcome. For example, if you used an original purchase price of $400,000 in the example above, the gross rental yield would be 6.5%.

Overall, the gross rental yield offers a simple way to compare properties quickly. It gives you an overview of how the rental income compares to the value of the property and how likely it is to generate a positive or negative cash flow.

However, it does not take expenses into consideration. For that reason, a lot of investors use the net rental yield as a more accurate way of assessing returns.

* Net rental yield = [(Annual rental income – Annual expenses) / Total property cost] x 100
The net rental yield offers a clearer indication of whether you can afford an investment property, as it factors in your expenses. To work it out, you’ll need to calculate or estimate your total property costs and total annual expenses.

Total property costs could include:
The purchase price/ market value
Stamp duty
Conveyancing fees
Building and pest inspections
Loan establishment fees

Total annual expenses may include:
Property management fees
Rates and water charges
Strata levies (if applicable)
Insurance
Mortgage interest repayments.

Example: A property with a weekly rent of $500 ($26,000 a year), total property costs of $500,000 and annual expenses of $5000 would have a net rental yield of: = [($26,000 – $5,000)/ $500,000] x 100 = 4.2%.

Calculating the net rental yield can be tricky, given you need to understand the costs of buying and running an investment property. If you’re stuck, please get in touch with a qualified accountant to help you crunch the numbers.

Yields versus capital growth

While strong rental yields are great, it’s important to remember that they’re not necessarily the be all and end all of a property investment. Some investors opt for a lower yield but focus on buying property that is likely to experience capital growth. It all comes down to your investment strategy and goals.
Investing in property opens up opportunities to build long-term wealth, potentially benefit from a positive cash flow and/or reap certain tax benefits. However, you should always consult a qualified financial planner or tax consultant before proceeding.

If you’re considering an investment property purchase, I can assist with arranging the right finance option to suit your investment strategy and goals. That includes everything from calculating your borrowing power to finding you a competitive investment loan for your needs. Please get in touch and let’s make it happen.

Changes to negative gearing tax deductions

Last year, important changes to tax deductions for property investors were announced. For some investors, the changes may have a significant impact on the annual deductions you can claim on your rental properties. As your mortgage broker, we like to keep you up to date. Here’s what you need to know about the changes when doing your tax this year.

Travel expense deduction scrapped

As of July 1, 2017, property investors can no longer claim a tax deduction for travel to maintain, inspect or collect rent for their rental property. Likewise, you can no longer claim travel expenses for preparing the property for new tenants, or for visiting a real estate agent to discuss your property. 

Investors who own property interstate will probably be the most affected by this change. If these changes do affect you, perhaps consider employing a property manager to perform some of these tasks for you, as their costs are usually still tax deductible. Talk to your accountant to find out more.

Depreciation deductions tightened

Depreciation is the decline in value of an asset with a limited life expectancy. Depreciating assets include carpets, furniture and appliances like water heaters and cookers (also known as plant and equipment).

Residential property investors can now only claim depreciation deductions for plant and equipment expenses if they purchased them. Previously, investors could claim plant and equipment depreciation on assets that were installed by a previous owner. 

This “integrity measure”, introduced in last year’s Budget, was intended to prevent multiple property owners from depreciating the same assets, exceeding their actual value. The changes apply to second-hand plant and equipment acquired after last year’s Budget night (May 9, 2017). You also can’t claim a deduction for plant and equipment installed on or after July 1, 2017 if you have ever used it for private purposes. 

If you owned or entered into a contract to buy your investment property before May 9, 2017, you will not be affected by these changes. You can still claim deductions for depreciating plant and equipment assets that were in the rental property before that date.

Further reading

You can find more information about the expenses you can claim for residential rental properties on the ATO website, available here. You’ll find details about expenses that are deductible immediately, such as management, maintenance and interest; and expenses that are deductible over several years, such as capital works and borrowing costs.

Your tax time checklist

Here are some tips to prepare for tax time:

Update your Depreciation Schedule. You can find a Guide to depreciating assets 2018 here. If you’re confused, seek advice from your accountant. If it’s a new property investment, you may need to have a quantity surveyor prepare a Depreciation Schedule report.

Understand what you can claim (refer to the ATO website for clarification).

Get your documents together and organise your receipts.

Tally up your deductions. It’s a good idea to create a spreadsheet with all your income and expenses listed. That way, you can save on accounting fees (rather than giving them a shoe box of receipts to go through).

Book in with your accountant (they are flat out at tax time, so the sooner the better).

As your mortgage and finance broker, we’re happy to work with your accountant or financial planner on your investment property finance.  Good luck with your tax, and if we can assist in any way, please don’t hesitate to get in touch!

Changes to credit reporting and how they affect you

This month, we saw important changes come into effect that could impact your ability to take out a home loan – or make it easier, depending on your credit history. In this article, we explain the new credit reporting changes and how they may affect you. 

But first, let’s start with the basics – what is a credit report and why is it important? Remember, if you have any questions, your mortgage and finance broker is a great source of information.

What is a credit report?

Credit providers like banks, utility companies and telecommunications carriers provide details about your credit habits to credit reporting bodies. These agencies use this information to compile your credit report. 

Among other details, your credit report contains your credit rating. This is a numerical value between zero and 1200 that represents your creditworthiness and how reliable you are as a borrower. The higher the score, the better.

What is your credit report used for?

When you apply for a home loan or another type of loan like a car loan, the lender will use your credit report to help them decide whether to approve the loan. They’ll consider details like your repayment history when assessing your ability to repay. Only licensed credit providers can access the repayment history information contained in your credit report.

Recent changes

From July 1, Comprehensive Credit Reporting (CCR) became mandatory for the big four banks. In the past, banks may have only shared negative financial information about you with other lenders, but under the new CCR regime, they’ll have to pass on positive information about you as well. Technically CCR has been in place since 2014, but the Australian Government recently made it compulsory for the big four banks to participate in the program to use credit reporting information to assess lending risks.

Here are some examples of the type of information that may now be shared:

Negative financial information:

• Payment defaults

• Overdue payments

• Declined credit applications

• Bankruptcy situations

How will the changes affect you?

The new credit reporting system will give lenders a more complete picture of your credit position. What that means is that they’ll have access to a more comprehensive set of data when assessing loan applications, so it will be easier for them to assess if you can afford to take on more debt.

If you have a positive financial track record, it’s likely your credit score will improve following the changes. Consequently, it may be easier for you to be approved for a home loan. You may even be able to negotiate a better deal (or have us do it for you).

How to keep your credit report healthy

Here are some tips to keep your credit report in check:

• Pay your bills and make loan repayments on time

• Pay your credit card off in full each month

• Lower your credit card limits

• Consider consolidating debt (speak to us about this)

• Limit your credit enquiries, as frequent applications can look bad on your credit report

• Remove your name from utility bills if you move

• Be cautious about identity theft.

How to access your credit report

 You can access a copy of your credit report for free once a year from credit reporting bodies. The main ones are Equifax, Dun and Bradstreet, Experian and Tasmanian Collection Service. Simply visit the ASIC MoneySmart website to find out more.

Like to know more?

Your mortgage broker will be happy to explain how the changes to credit reporting may affect your eligibility for a home loan. Remember, for a lot of borrowers, mandatory CCR is likely to be a good thing, as it may improve your chances of being approved for a loan. It’s also expected to increase competition between lenders in future, which is a win for borrowers. Whatever your finance needs, we can assist, so please get in touch today.