The key numbers of property investment

Whether investing in residential, commercial or industrial property the numbers can be overwhelming. No matter what type of property you’re considering, there are some fundamental data points that remain the same. 

Different investment types generally offer different outcomes and the absolute starting point is understanding what your goals are, and should come before any consideration of investment type, be it property or otherwise.

Understand your goals

Your property investment should be highly considered and aligned to broader financial goals... ‘I want to build wealth from property’ isn’t enough. 

Some key considerations;

• Are you looking for a short term investment with high capital growth to sell say within 5-10 years to derive cash profit

• Or a long term investment with reducing debt that delivers cashflow into retirement

• An investment that builds equity that can be leveraged for further investments

These are important questions that need consideration alongside the numbers. Goals also play a large role in how you structure your finance if you’re to debt fund an investment. 

Understand the numbers

Purchase price is the glaring number but the joy of an investment is that you can remove emotional attachment and buy at a price point suitable to your circumstances. Relative to this and considered alongside is stamp duty which is a huge cost in Australia and hinders the ability to turn a profit from property quickly (ie you need at least enough capital growth to cover the duty expense).

Capital growth is the return relating to the purchase price being how much a property is expected to grow over a period. If your goal is to buy in a high growth area to sell at a higher value then capital growth is your main property goal. 

Yield or rental return is the income from the property relative to its value. Commonly you should look at net yield which includes ongoing costs such as strata fees and maintenance. If you’re looking for a property that is cash flow neutral or positive then yield is a key figure for you consider. 

Net Rental Yield = ((annual rental income - annual expenses) / property value) x 100

Yield is generally higher in regional areas and on industrial and commercial property, whereas yield in metro areas is generally lower though offset by high capital growth potential. 

Ongoing costs cover items including upkeep, strata costs, council rates, insurance and major repairs. The age and type of investment property is an important consideration. When considering commercial property for example, whilst the yield can be really strong, ongoing costs can be relatively high.

Vacancy costs should also be considered (especially in COVID times) and pose a higher risk with commercial or industrial property where finding the right tenant can take time (that said, 10-20 years leases are common for commercial property). 

Finally, finance costs are a huge consideration. The structure of your finance needs to correlate to your investment goals and needs consideration of things like interest only options that come at a premium interest rate. 

There are many aspects to consider, and ensuring alignment of investment goals and finance structure are vital. 

If Highlands Funding can assist you, please feel free to get in touch.