One striking investment opportunity which provides consistent passive income is a rental property. With the present economic conditions, these rental properties are considered secure investments as they are not affected much by the market volatility. They certainly provide steady returns. Once you do it right, rental property investing is a sure way to create one’s wealth. Investors just have to plan thoroughly and have that firm commitment to succeed in this kind of investment strategy.
Potential Returns of the Property – how is it done?
One significant factor to think about real estate investment before you go through it is the potential return of the property you have or its “yield.” What does it mean? According to industry experts, yield is how the investment property’s future income is being measured. It is computed simply as a percentage on an annual basis based on the cost or market value of the property. Exclude capital gain as you do the computation for the yield.
Remember that yield has several types and a more in-depth knowledge about their differences are important for every investment undertaking. Know all about the types of yield below.
Gross Rental Yield
Gross Rental Yield is earnings gained from a property before the expenses are subtracted. The computation goes this way: get the rental income annually then divide it with the property’s price then multiply by 100.
Below shows how it is being calculated with a $500,000 property with a rental rate = $300/week:
Gross rental yield: ($300 x 52) = $15,600/ $500,000 x 100 = 3.12%
Net Rental Yield
Net Rental Yield is an investment property’s income after all expenses have been considered and deducted. Such expenses include costs associated with the purchase of the property like legal fees, stamp duty, and building inspections, as well as other costs like advertising. The income loss due to vacancy is considered, too. Other additional expenses included in the calculation are insurance, management fees and maintenance repairs.
Net yield is computed by deducting the expenses from your rental income for the year. Then divide it by how much the property is and then multiply by 100.
Check the computation below using the property in the example above, with total costs = $3,000.
Net rental yield: ($15,600 – $3,000) / $500,000 x 100 = 2.52%
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Return or Total Return Yield
The return is either what you’ve lost or gained from an investment for a particular length of time, including capital gain. This return is directed towards the earning potentials of the investment in the future versus a yield that’s dependent on the market performance of the property.
Rental yield is not the only factor to consider for property investing as many experts stated. A sustainable portfolio by investors should have a steady balance between capital growth and rental yield.
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Many experts also believe with the fact that high-yielding rental properties are certainly the best type of investment for those who want to have increased returns or cash flow. A stable rental income has 5.5% and above gross yield so this puts you in a perfect situation.
Which Locations Have the Best Rental Yield?
What’s important in searching for high-yield properties is to target the suburbs that are reasonably priced and have good rental returns. Where are these areas? They’re typically outside the major key cities which have lower yields and costly housing prices.
Here is a comprehensive list of the top five suburbs with high-yield rental houses from each state and territory
New South Wales
| Suburb | Median Price | Median Rent | Rental Yield on Houses |
| Dareton | $133,000 | $295 | 11.53% |
| Bourke | $145,000 | $300 | 10.76% |
| Broken Hill | $145,000 | $260 | 9.32% |
| Captains Flat | $300,000 | $490 | 8.49% |
| Peak Hill | $160,000 | $260 | 8.45% |
Victoria
| Suburb | Median Price | Median Rent | Rental Yield on Houses |
| Ouyen | $145,500 | $270 | 9.65% |
| Mortua | $142,500 | $213 | 7.77% |
| Donald | $182,500 | $260 | 7.41% |
| Warracknabeal | $185,000 | $250 | 7.03% |
| Merbein | $221,000 | $290 | 6.82% |
Queensland
| Suburb | Median Price | Median Rent | Rental Yield on Houses |
| Scottville | $103,00 | $263 | 13.28% |
| Collinsville | $115,000 | $270 | 12.21% |
| Blackwater | $148,000 | $300 | 10.54% |
| Mundubbera | $145,000 | $293 | 10.51% |
| Dysart | $149,000 | $300 | 10.47% |
Canberra
| Suburb | Median Price | Median Rent | Rental Yield on Houses |
| Lawson | $618,00 | $750 | 6.31% |
| Throsby | $923,000 | $810 | 4.56% |
| Taylor | $861,000 | $730 | 4.41% |
| Wright | $1,097,500 | $925 | 4.38% |
| Denman Prospect | $1,205,000 | $1,015 | 4.38% |
South Australia
| Suburb | Median Price | Median Rent | Rental Yield on Houses |
| Coober Pedy | $77,500 | $150 | 10.06% |
| Peterbrough | $99,000 | $190 | 9.98% |
| Port Agusta | $160,000 | $300 | 9.97% |
| Keith | $146,000 | $250 | 8.90% |
| Jamestown | $147,000 | $240 | 8.49% |
Western Australia
| Suburb | Median Price | Median Rent | Rental Yield on Houses |
| Kambalda East | $90,500 | $200 | 11.49% |
| Rangeway | $119,500 | $260 | 11.31% |
| Wickham | $227,500 | $475 | 10.86% |
| Witchcliffe | $177,500 | $370 | 10.84% |
| Tom Price | $435,000 | $900 | 10.76% |
Northern Territory
| Suburb | Median Price | Median Rent | Rental Yield on Houses |
| Gray | $380,000 | $500 | 6.84% |
| Humpty Doo | $432,000 | $550 | 6.62% |
| Berrimah | $401,140 | $510 | 6.61% |
| Sadadeen | $458,750 | $570 | 6.46% |
| Moulden | $367,000 | $450 | 6.37% |
Tasmania
| Suburb | Median Price | Median Rent | Rental Yield on Houses |
| Queenstown | $149,000 | $250 | 8.72% |
| Zeehan | $148,500 | $230 | 8.05% |
| Rosebery | $135,000 | $200 | 7.70% |
| Gagebrook | $310,00 | $360 | 6.04% |
| Ravenswood | $280,000 | $320 | 5.94% |
Is it Worth it to Own Rental Property?
Each investment has its advantages and disadvantages and rental properties are no different.
Listed below are the benefits and pitfalls of rental properties:
ADVANTAGES:
- Stability: Rental residential properties are always in demand since a house is a basic need. As the housing industry has its fluctuations, it appears to be lesser in instability vs. other investments.
- Positive Returns (Cash Flow): Property-owners usually pay off their loans and other costs with the rental income they earn. Thus, rental properties are generating fixed and stable income. And when the income is greater than the total cost of maintenance and repayments combined, that is what positive return means. Simply put, more cash in your pocket.
- Tax Deductions/Benefits: Most residential property owners are eligible for several tax benefits or deductions, allowing them to optimize their investment returns.
- Stronger Investment over Time: Through the years, the rental property’s worth may rise, including the rent, particularly for properties belonging to high yielding areas. It suggests a boost in cash flow which in turn denotes a stronger cash flow which can possibly be used for the financing of additional properties as investments.
DISADVANTAGES:
- Short in Liquidity: If you need to have easy and fast access to cash, then you may be in a drawback as it will take a while in selling your property if there’s a need, unlike other investments, like stocks.
- Higher Costs: Many Australians are faced with hurdling property investing due to the challenge of heavy financing. One single deposit can cost a great deal of money.
- Continuing Expenses: Due to the costs involved, rental property investing requires thorough preparation and good planning. Ongoing expenses related to property ownership are mortgage repayments, repairs, renovation and maintenance expenses, insurance, and council rates. It’s essential to have an investment strategy most especially when your rental income is more than all the ongoing expenses.
- Non-quality tenants: Having bad or difficult tenants could be a letdown for landlords. These tenants may cause some emotional stress and their actions could result in losses, more so if they are continuously delinquent in paying for the rent or when they cause undue damages to your home.
Is rental income part of my annual tax return?
YES – per the Australian Taxation Office (ATO), an investor’s rental income must be taxed with a specific marginal tax rate. This must also be included in his yearly tax return.
Listed below are ATO’s 2021-2022’s marginal tax rates showing the amount an owner has to pay from his rental income.
| Taxable Income | Tax on this income |
| 0 – $18,200 | Nil |
| $18,201 – $45,000 | 19 cents for each $1 over $18,200 |
| $45,001 – $120,000 | $5,092 plus 3.25 cents for each $1 over $45,000 |
| $120,001 – $180,000 | $29,467 plus 37 cents for each $1 over $120,000 |
| $180,001 and over | $51,667 plus 45 cents for each $1 over $180,000 |
Property rental owners can lessen their annual tax with several deductions. But the ATO emphasized that deductions can only be claimed with their property for the time/dates when it has tenants or is available openly for rent. Plus, an investor’s claim for deduction should only be for a portion that an expense was utilized for earning an income. One should also show the records to validate these expenses.
Landlord’s Expenses
Apart from the monthly mortgage repayments, landlords have to handle ongoing expenses to maintain their properties in a liveable condition. Among these expenses are body corporate charges, repair and maintenance expenses, council rates, and insurance fees. A landlord is also required to pay land tax and this is dependent on which state you’re in.
In addition to one’s monthly expenses, you may even hire a property manager when you can’t do it yourself but this will add to your budget. Set aside money as well for advertising to attract the right tenants.
Below is a list of what deductions a rental property owner can claim:
- Insurance expenses (building, public liability, contents)
- Interest expenses
- Pre-paid expenses
- Property agent’s fees and commissions
- Income protection insurance fees
- Repairs and maintenance expenses
- Legal expenses
- Land taxes
- Advertising for tenants
- Body corporate charges
- Council rates
- Water charges
- Cleaning expenses
- Gardening and lawn mowing costs
- Pest control fees
Rental expenses landlords claim within many/several years
- Capital expenditures and capital allowances
- Capital works
- Borrowing expenses
- Initial repairs
- Depreciating assets
TIPS for choosing the RIGHT Property:
Most experts agree that choosing the right property is critical, it’s either a win or bust, that’s why detailed planning and complete due diligence are important.
Here’s a list of indicators that will GUIDE you if the property you selected is a good one. Read on.
1. Site or Location
The property’s site influences the following factors the most: quality of the tenants, rate of returns, and demand for rental. If a property belongs to a high-growing market, it is highly likely that the price of rent, quality of tenants, and the worth of the property all follow the same upward trend, too. What are the signs of a high-growth area? These can be the dynamic population – continuously growing, accessibility to public facilities and amenities like transport, robust job market, little crime rate, favourable taxes, public transport accessibility, and reasonable insurance.
2. Property Situation
If you were to choose a property for investment, it is recommended that you conduct a detailed home inspection to assess the state and condition of the property – if it is in perfect condition and ready for potential tenants, as costs for repairs and upkeep may eat up one’s budget and affect investor’s cash flow.
3. Demand for Rent: Low vacancies + listings
There are areas with lesser listings as well as vacancies suggesting that there’s a solid rental market. If vacancy rates are low, landlords can potentially increase the rental rates and get higher returns. A strong market consists of two things: low numbers in both vacancy rates and listings.
4. Strong cash flow
Aim to achieve a positive cash flow every month, meaning that the income being generated should adequately cover pretty much everything of the ongoing costs of the investment property.
5. Capital growth potentials
Aside from the cash flow, an investor is expected to earn profit from the rental property. The usual way to establish profit is called ‘cash on return’ as it indicates the way the investment is being funded. Anything about 8% and above is a good rental property’s cash on return, according to some experts.
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