When you’re looking for an investment property, you are often either looking for capital growth or yield (ideally a positive cash return). There’s a quick and easy trick that we, at The Mortgage Lab, use to calculate yield on any property we’re looking at.
Previously, we have looked at The Rule of 72 to calculate how long it would take to double the investment. This month, we look at how to quickly calculate the yield on a property. You’re going to need the following bits of information:
As an example, a $600,000 property might receive $500 per week rent.
$500 * 52 weeks is $26,000
$26,000 / $600,000 is 0.043 (or 4.3% return).
So this property has a 4.3% (gross) return based on rental income to value alone.
A 4.3% return would cover most Principal and Interest payments (currently) but probably won’t cover additional expenses like insurance and rates. Each individual property requires a different amount of income to get positive cash results. What we’re looking for is a quick calculation to see how one property compares to another.
Let's say that 5% yield is a decent baseline for yield on a property. If we're looking for yield, anything below that is probably not worth investigating any further. What is a quick calculation to get 5% return?
Well, very approximately:
In the example above, the house was worth $600,000. If the rent had been $600 per week, then:
$600 * 52 weeks is $31,200
$32,000 / $600,000 is 0.052 (or 5.2% return)
So for any property you are looking to purchase, knock the last 3 numbers off and you have the rent required to get to around 5%. A $750,000 property needs a $750 per week rent. A $400,000 property needs a $400 per week rent.
It's not always easy to get started. What do you need to know?
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