Getting an above average return on your next Investment property either Residential Commercial retail or Industrial is easy if you know a couple of simple formulas.
Right now I’m going to discuss one …
What is the Capitalisation rate of your property ?
That is, hat is the yield you will receive from your Investment?
How much cash will be in your account after paying expenses to maintain the property. (Rates, insurance, maintenance and management fees.
Here is the Formula, write it down if you’re in your 60’s like me (so you can pass it on to your children and their children.
NETT INCOME divided by the Purchase Price = RETURN ON YOUR INVESTMENT or Yield.
Example 1: You purchase a residential Investment property for $750,000 the rental is $650.00 a week or $33,800.00 per/ annum, now take away your expenses to maintain this investment, lets say $6,000.00
NO- you don’t deduct interest payable on a Mortgage, So nett Rental is $27,800 per annum.
Now divide that by your purchase price $750,000 = 3.7 % return approximately.
Example 2: You purchase a Commercial /Industrial retail property for $450,000 and the rental income is $35,000 with a 3 year lease and a 3 year option and every year the rent goes up automatically by 4%.
As a guide in commercial property investment we use 20% to calculate the outgoings.
So, 20 % of $35,000 is $7,000.00 leaving a nett rental of $28,000.
Now divide by $450,000 = 6.2 %
The higher the Yield the higher the risk.
If my Retail shop had a good national tenant, say The Cancer Council the purchase price would be higher say $550,000 resulting in a Yield of 5.1%.
In summary you can get an above average yield depending on the type of property (residential or commercial, the tenant, and the level of risk you are willing to take in order to reach your desired yield.
Any Questions ? I am happy to answer. I have been in the finance industry for over 35 years and was the 12th person in Australia to obtain my Australian Credit Licence (#364 395).
02 9299 1144