For most investors, the most important factor in a property is the yield: how much revenue the property will produce. If you want to be a professional property investor as opposed to an amateur, you will work out the yield before buying any investment property. Even in Perth, the yield makes a huge difference in whether your property makes money or turns into a dreaded “money pit.”
However, you need to know about the different kinds of yields and a few ancillary terms to ensure that you fully understand how much revenue your property will produce. It should be a major part of your decision-making process when deciding whether or not to purchase any particular property.
Yield
The yield is the amount of income produced by an investment, as a percentage of its value (or purchase price). Remember that yield has nothing to do with capital gain, which is a different metric altogether.
Gross Yield
Gross yield is how much revenue the property produces (as a percentage of its value) before expenses. It is similar to your “gross earnings” before taxes. This number will be considerably higher than your net yield. Be sure not to confuse the two.
I suggest you include the costs for purchasing such as settlement agent, transfer, and stamp duty to come up with a total purchase cost for the property.
So for a property that cost you a total of $450,000 to buy, which is returning $450pw, the gross yield would be 5.2% (450pw x 52 weeks divide by $450,000).
In Perth it is not difficult at all to find properties that will produce a gross rental yield of at least 5%, up to 6% is not uncommon.
Net Yield
The net yield is how much the property produces (as a percentage of its value) after expenses have been deducted from the income. This includes vacancy costs such as advertising and lost rent, strata fees, maintenance, property management, council rates, water rates and insurance all deducted from the income.
Total Return
This is often just called “return.” To simplify, it’s the net yield added to the capital gain. It is also usually given as a percentage of its value. This is done in retrospect, so it is more accurate than yield, which is computed beforehand.
Average Yields
Average yields can be quoted for a state, a city or a neighbourhood. You always want to know what the average yields are for any area in which you plan to invest—and that is where Investors Edge can help you.
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