All forms of investment rely on calculated risk-taking and the ability to manage and organise finances. It wouldn’t be feasible to make an investment without having some idea of the potential return. Of all investment options, this is especially true for property.
Property is a tangible investment that creates wealth through rental income, tax incentives and capital growth, so it’s important to know how to calculate the true property investment return. In order to do so, you must first understand the key elements involved in property investing such as net yield, capital gain, holding costs and cash flow.
Contents
- Net yield
- Capital gain
- Holding costs
- Cash flow
- How to calculate your property investment return
- Boost your cash flow with depreciation
- How to calculate your property investment return with PropCalc
Net yield
Also referred to as the rate of return, net yield is the return on your investment after expenses and outgoings are deducted. It considers the property’s price or market value, expenses and rental income and is expressed as a percentage. Net yield can be difficult to calculate as some expense and outgoings will vary.
Capital gain
Capital gain is the profit made from the sale of an investment property. This profit is referred to as a capital gain and is the difference between what you paid for the property (your cost base) and what you sold it for. Capital gains tax (CGT) is included in your assessable income and taxed at your marginal rate.
Find out when you pay capital gains tax on an investment property and further information on CGT .
Holding costs
Holding costs are the ongoing expenses involved in owning an investment property. This can include costs such as property management fees, strata fees, insurances, repairs, maintenance, mortgage repayments and council rates. While many people consider the cost to purchase an asset, some don’t fully consider all of the associated holding costs and this can be detrimental to an investment strategy.
Cash flow
Cash flow refers to a stream of finances going into and out of an investment property. Positive cash flow indicates that your investment is providing you with more money than it’s costing you to own. Negative cash flow means that your holding costs outweigh your profits.
How to calculate your property investment return
Now you understand the key principles involved in property investing, you can start calculating your property investment return. The return on investment indicates the percentage of money returned to you after holding costs are deducted.
The first step is to calculate or estimate the property’s annual rental income. For example, if you own a ten-year-old investment property purchased for $400,000 and earn a rental income of $490 per week, your annual rental income will total $25,480.
Next, calculate or estimate your holding costs. To help you get started, here is a list of expenses to consider:
- Property management fees
- Insurance policies
- Council rates
- Land and water rates
- Interest on mortgage repayments
- Repairs and maintenance
A typical property with this purchase price would have total expenses of around $33,400. If you take away the holding costs from the rental income, this will provide you with your return.
$25,480 – $33,400 = -$7,920
As you can see, your return is negative, meaning the property is negatively geared.
Fortunately, you’re entitled to claim your loss on tax at the end of every financial year. You can also claim depreciation deductions to reduce your taxable income and therefore boost your cash flow.
Boost your cash flow with depreciation
Depreciation is the natural wear and tear that occurs to a property and its assets over time. The Australian Taxation Office allows owners of income-producing property to claim this wear and tear as a deduction each financial year for up to forty years.
As your investment property is ten years old in this example, you won’t be eligible to claim any previously used plant and equipment assets as per 2017 legislation. Find out more about the 2017 depreciation legislation here.
The following scenario shows your cash flow with and without depreciation:As you can see, you’re entitled to $5,450 in depreciation deductions in the first financial year alone. Without depreciation, you were paying an outlay of $96 per week. By claiming depreciation, you’re able to reduce this outlay to $57 per week, saving $39 per week.
How to calculate your property investment return with PropCalc
If you are looking to buy an investment property, use PropCalc to calculate your property investment return before making a purchase. PropCalc uses key market analysis and customisable data to show exactly how a purchase will affect your cash flow.
More than just a mortgage calculator, PropCalc allows you to personalise data such as purchase costs, property income, annual expenses and cash flow, producing results for specific scenarios customised by you. The free calculator also considers the stamp duty, variable deposits, interest rates and finance fees.
The tool can determine whether a property is likely to be negatively or positively geared based on your financial situation and estimates the likely depreciation deductions available to be claimed.
PropCalc is free of charge and available in MyBMT, a comprehensive portal designed to help investors access and manage their depreciation and property needs. The interactive platform gives you on-the-go access to depreciation information, insurance quotes, valuable market analysis and helpful property tools. Register for MyBMT here.
PropCalc is also available as a downloadable app. Find the convenient tool at the App Store or Google Play today.
Depreciation sounds great and QS and property people make it out to be such a great thing. For cash flow, maybe, but you are just kicking the can down the road. At least tell you readers that truth about it. Let them know that when they sell, they have to pay it back out of the capital gain! On a relatively new property held for several years, your up for a bucket of money to payback. But you guys, property people, never tell it as it is.
Hi Tony,
Thanks for your comment.
Yes, depreciation can decrease a property’s cost base and therefore impact capital gains tax.
We appreciate that there are many views on this topic. It’s important to remember that there are capital gains tax discounts available, including the 50 per cent discount if you have owned the property for more than 12 months.
We recommend discussing capital gains tax with your accountant as they can provide further insight on how it is calculated.
Thanks,
The BMT Team