Calculating Return - ROI

Posted by lindsay on March 2, 2014

For those new to the property market, it can be a steep learning curve. There’s a lot of information to consider before making the choice to engage in property investment. 

One item to examine is possible rental income return. Doing this helps prospective buyers to compare different investments, wrote the Australia New Zealand (ANZ) bank. There are two common measures used for this: gross rental yield and rental return on investment.

Gross rental yield is the rental income received relative to the property’s value. It allows you to contrast the return between multiple homes, as well as determine how well the actual investment opportunity matches your goals. To calculate gross rental yield, divide the property’s annual income by the purchase price and then multiply is by 100 to get the yield (i.e. percentage rate of return).

Rental return on investment is the income received relative to the equity, or investment, in the property. When determining this, prospective buyers should remember to factor in
costs associated with borrowing, as well as maintenance and management. To calculate, work out the annual rental income and subtract total yearly expenses. Be sure to include any mortgage repayments, rates, insurance, and other maintenance fees. Take this net operating income and divide it by the total amount of the investment. Finally, as with gross rental yield, multiply by 100.

Both these calculations can then be used towards your final decision on which property investment opportunities are best.