Cash flow considerations
Property has long been a favourite investment choice for Australians and with values historically doubling every eight to 12 years there’s little wonder why!
But capital gains is really only half the story when considering your potential return on investment. Shrewd property investors also look for cash flow opportunities driven by good rental values.
The current market couldn’t be more attractive for property investors. There is a dramatic shortage of rental accommodation across Australia, and with immigration on the rise and building activity currently subdued that shortage looks set to intensify.
This imbalance in supply and demand means rental returns look set to head in one direction – and that’s up. So what’s the winning formula to picking an investment property that offers good cash flow?
Most of the same principals to selecting an investment with the potential for good capital growth also apply to properties offering solid rental yields.
Location is the key consideration – so make sure you invest in an area where there is likely to always be competition among tenants for rental property.
This could be on the city fringes where commuting is easy; otherwise close proximity to train stations and other public transport usually helps to also add value.
Moreover, consider what amenities are close at hand – schools, hospitals, shops and entertainment within easy reach are all a plus when seeking investment locations.
As well as these key points, also consider the kind of tenants you want to attract. For example an inner city apartment is likely to appeal to professional couples, whereas a suburban house is better suited to a family.
Check rental prices and vacancy rates in the area with local estate agents before making an offer on a new investment property, and remember to speak with your mortgage broker to explore the different financing options available to you.
NUMBER CRUNCH As a rule of thumb, rental returns are measured in percentage terms rather than dollar values. So by Australian standards a six to seven percent return is considered good in anyone’s book. To calculate the annual rental return on your property simply work out its annual rent, divide by the value of the property, and then multiply by 100.
Example Weekly rental return: $400 Property value: $300,000
$20,800 (annual rent) divided by $300,000 (property value) = 0.069. Times by 100 – annual return is 6.9 per cent.