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We reveal the secrets to high returns with our step-by-step guide to calculating ROI on investment property.
ROI and property should go hand in hand. Essentially, you should be aiming to invest in properties that give you an above-average return on investment (ROI) to grow your long-term wealth. Savvy investors use a range of strategies to achieve this goal.
First, it’s important to understand the two key components of ROI – rental yield and capital growth.
Rental yield is a percentage value that reflects the annual rental income you receive from an investment property divided by its purchase price. It’s calculated by using a simple formula:
(Annual rental income divided by property purchase price) multiplied by 100
For example, if you buy an investment property for $850,000 and you rent it out for $850 per week (i.e., your annual rental income is $44,200), then your rental yield would be:
($44,200 divided by $850,000) multiplied by 100
= 5.2%
Rental yields between 4 and 5% are generally considered to be good in Australia’s current real estate markets. The average rental yield across Australia is 3.8% according to the latest CoreLogic report. It averages 3.6% in Australian capital cities and 4.4% across Australia’s regional areas.
Capital growth is the other component of ROI. It reflects the increase in a property’s market value overtime. It can either be expressed in dollar terms or as a percentage figure. The percentage is calculated using a simple formula:
(Increase in property value over time divided by purchase price) x 100
For example:
According to the Core Logic report ending 31 May 2024, the average annual capital growth across Australia is 12.5%. It averages 12.7% in Australian capital cities and 11.6% regionally.
To maximise your ROI make strategic decisions to buy properties in high-demand, growing locations that will generate above-average returns.
Maximising your ROI involves making strategic property investment decisions to buy properties in high-demand, growing locations that will generate above-average rental returns and above-average capital growth over time.
These locations tend to offer a combination of economic, social and lifestyle benefits that make them attractive to both tenants and owner-occupiers, ensuring consistent strong demand for quality properties.
In part two we look at three case studies of areas where DPN’s customers have been able to maximise their ROI.
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