Property Investment Analysis Part 2

So we have considered that a return is based on both income and capital gain. We have also seen that a simple yield can be calculated by using the formula: gross rental / purchase price.

However, we know that this is oversimplified because it does not take into account expenses that are associated with owning the property.

From that rental income we have to pay insurance, rates, maintenance, and even some to the dreaded tax man. So we have to analyse our rental income in a NET form, after we have paid for any expenses involved in owning the property.

Example 2
Purchase Price = $275,000
Gross Rent Per Annum = $30,000

Less
$1,500 Rates
$1,500 Insurance
$500 Maintainence
$ 1,000 Other Costs

Total Costs = $ 4,500
Net Income = $25,500
Yield = Net Income/Purchase Price
Yield = $25,500/$275,000
Yield = 0.0927 or 9.27%

You can see that our return has dropped by over 1.5% when we take into account the expenses involved in running the property.

Now this type of analysis is fine if your looking to calculate the return a property will provide within the FIRST YEAR of ownership.

But very few residential property investors will look at holding a property for just one year however. It therefore becomes necessary to be able to calculate a property's overall return after 5, 10, 15 or even 20 years.

To do this we need to consider changes in rental levels, rises in property expenses and all those other variables which change constantly over time.

The good news is that with the aid of a computer, we can carry out this detailed analysis virtually at the blink of an eye.

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