Gross yield, rental return and capital growth explained

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If you are purchasing your townhouse to rent out, you will be interested in your potential rent and your gross rental return.

GROSS RENTAL RETURN (OR YIELD):

The gross rental yield is used to compare the rental return versus other properties or investments. Divide the rental income you are likely to receive in a year by the properties purchase price. If your townhouse rents for $600 per week and the purchase price is $650,000, you multiply the $600 per week by 52 ($31,200) and then divide it by the $650,000 purchase price. You will achieve a 4.8% rental yield.

The gross rental yield gives you an idea of the cash flow potential, but excludes any potential tax benefits from depreciation and gearing. It is also only an indication of the starting gross rental yield. If you hold the property and rents go up, you will improve your position over time.

INVESTMENT RETURN:

Your investment return is the percentage of change in the value of your investment over time. Working out your potential investment return will help you to determine how much your townhouse property may increase in value over time.

WHAT IS CAPITAL GROWTH:

Capital growth is the increase in value of your property portfolio over time and should be considered alongside the property’s gross rental return or yield.

Most cites and towns in Australia have had periods of strong capital growth over the past 10 to 20 years which has seen many home owners with new properties increase significantly in value over a short period of time.

While there is no guarantee your property will gain in value over any given period, and capital growth largely depends on where and what you buy, historically real estate experiences steady growth over the long term.

If you are considering the purchase of a new home or an investment property, the townhouse buyers guide will help you to better understand all the steps to buying off-the-plan, under construction or newly built. The free guide covers the A to Z of buying new and is a must read for all singles, downsizers, families, investors and first home buyers. Click here to request your free copy now.

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