What is a good return on an investment property?

A good return on an investment property in Australia can vary depending on several factors, including the location, property type, market conditions, and individual investor goals. Here are some general guidelines to consider:

Gross Rental Yield
Gross rental yield is a common measure used to assess the return on an investment property. It is calculated as the annual rental income divided by the property's purchase price, expressed as a percentage.

Base Calculation - (Annual Rental Income / Property Purchase Price) x 100
Benchmark - a gross rental yield of 5% or higher is generally considered good. However, this can vary by location and property type.

Net Rental Yield
Net rental yield provides a more accurate picture of the return by accounting for expenses such as property management fees, maintenance, insurance, and other costs.

Calculation - [(Annual Rental Income - Annual Expenses) / Property Purchase Price] x 100
Benchmark - a net rental yield of 3-4% or higher is often considered good, but again, this depends on the specific circumstances.

Capital Growth
Capital growth refers to the increase in the property's value over time. Investors often look for properties with strong potential for capital appreciation. An economic consensus in Australia is that property prices double every 14 years, but this should be taken as a guide rather than the rule across our many property markets.

Benchmark - an annual capital growth rate of 5-7% is generally considered good. Some areas may experience higher growth rates, especially in periods of strong market performance.

Total Return
Total return combines rental yield and capital growth to provide a comprehensive measure of the investment's performance.

Benchmark - a combined total return (rental yield + capital growth) of 10% or higher is typically seen as a strong performance.

Market Conditions
Current market conditions play a crucial role in determining what constitutes a good return. During periods of low interest rates and high demand, returns maybe lower due to higher property prices.

Individual Investor Goals
The definition of a good return can also depend on an individual investor's goals, risk tolerance, and investment strategy. Some investors prioritise steady rental income, while others focus on long-term capital growth.

Ultimately, it's important to conduct thorough research and consider both rental yields and capital growth potential when evaluating an investment property. Working with property investment professionals and a qualified accountant can also provide valuable insights tailored to your specific investment goals.

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