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Property investment jargon can be confusing. Here's a clear explanation of the fundamentals and how property investors can apply these metrics to their own situation.
It can be easy to get lost in the jargon when researching a property investment opportunity. Which is why we’ve come up with a clear explanation of the fundamentals, and how investors can apply these metrics to their own situation.
To develop this guide, we sat down with Alex Reithmeier, DPN’s in-house researcher and property economics guru. It is Alex’s job to identify the next emerging growth areas, looking carefully at value, potential for capital growth and also rental yield.
We will start by explaining how these metrics are calculated and why they are important.
Similar to a dividend a shareholder receives, rental income from an investment property is a regular payment. Representing yield as a percentage is a useful way to compare one property’s performance against other, or to compare it with other property options and asset classes.
Here’s how to calculate gross rental yield:
A good rental yield for property is 4.0% to 6.0% per annum.
- Alex Reithmeier
When a property appreciates in value, say from $800,000 to $1,200,000 over a period of time, we call this capital growth, and, in this example, growth of $400,000, in percentage terms is a 50% gain on the original investment.
Capital growth is most frequently expressed per annum, as a percentage.
When you’re already in the market you can compare the capital growth of your property by looking at the purchase price compared to its current value. But if you’re looking to get into the market, how can you get an indicator of a property’s future growth?
If you’re looking to buy an investment property you should be less concerned with past performance and look to the future. DPN has access to market leading, independent data which provides predictive capital growth forecasts at a suburb level for the next 5 or 8 years.
DPN targets properties for capital growth gains starting at 4.0% per annum, which in addition to their rental yield, affords investors the ability to build wealth.
Total return harnesses both rental income and capital growth to identify the holistic outcome. This is the rate of return for an investment over a particular time period. For property this is the total value of rental income, plus the capital growth of the property.
Total returns = Rental gains + Capital gains
To demonstrate the calculation of total returns let’s look at DPN clients, David and Fran Dunne. They purchased a house and land package to build a Dual Income home in the suburb of Horsley, near Wollongong. This property has delivered strong results with a total return of 9.4%.
Client: David & Fran Dunne
Property: Dual Income home in Horsley, NSW
Purchase price: $717k in Oct 2015
Current value: $922k in May 2021
Capital gain: $205k
Capital growth: 4.7% p.a.
Total rent: $910 per week
Rental yield: 6.6%
Total returns: 9.4%
Well for starters, total return is good for comparing different asset classes, such as real estate against comparative investments in stocks, bonds or even bank interest, to show the real appreciating value of an asset.
Australian property has historically performed well over a long-term horizon, averaging 10.2% per annum over the last 20 years compared with Australian shares averaging 8.8% p.a.
At DPN we monitor the many property markets right across Australia to identify the best combination of total returns for our clients. Typically, total returns are in the 8-11% range per annum for DPN clients - try finding a bank with returns like that!
We hope this has helped you understand what makes a successful property investment so you can evaluate the right metrics and make well informed decisions. As always, we are happy to answer any questions you may have around property data.
*CALCULATIONS:
DPN property investments typically exceed even local suburb performance through our tried and tested methodology:
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