Rental properties are often considered an attractive investment option because they give investors a great opportunity to create a steady flow of passive income. And given the current economic climate, rental properties can also be a secure investment because they are less likely to be affected by market volatility and more likely to generate fixed returns.

If done right, investing in a rental property can be an effective way to build wealth, so investors need to plan carefully and have unyielding commitment to succeed in this kind of financial endeavour.

## How much should a rental property make?

One of the most important factors investors need to consider before plunging into real estate investment is the property’s potential return, known as its “yield.” Industry experts define yield as the measurement of future income on an investment property. It is often calculated as an annual percentage based on the property’s cost or market value. Another thing to note is that capital gain is not considered when computing for yield.

But yield also comes in several forms and a deep understanding of how these are different from each other is vital for every investment success. Below is an explanation of the different types of yield.

### Gross rental yield

This is the income an investment property makes before expenses are deducted. It is calculated by taking the annual rental income, dividing it by the property value, and then multiplying it by 100.

Here is a sample computation for a \$650,000 property with a rental rate of \$350 per week:

Gross rental yield: (\$350 x 52) = \$18,200 / \$650,000 x 100 = 2.8%

### Net rental yield

This is the income an investment property makes after expenses have been deducted. These expenses include costs associated with buying the property such as stamp duty, legal fees, and building inspections, and rental-related costs such as advertising and income loss due to vacancy. Repair and maintenance costs, management fees, and insurance premiums are also included in the calculation.

Net yield is calculated by taking the annual rental income and then subtracting the yearly expenses. The difference is then divided by the property’s value and then multiplied by 100.

Here is a sample computation for the same property above with total expenses of \$4,000:

Net rental yield: (\$18,200 - \$4,000) / \$650,000 x 100 = 2.18%

### Return or total return yield

A return is defined as the gain or loss made on an investment during a specified period and where capital gain is included. Unlike yield, which is reliant on the property’s market performance, return is focused on the investment’s future earning potential.

According to many experts, rental yield should not be a sole consideration when investing in property, adding that a balance between rental yield and capital growth plays a crucial role in helping investors achieve a sustainable portfolio.

However, these experts also say that properties with high rental yield would still be best for investors looking to boost their cash flow. Ideally, investors should aim for a gross rental yield of above 5.5% as this shows stability in the rental income.

## Where can I find the best price to rental yields?

The key to finding high-yield rental properties to look for suburbs that have both affordable property prices and relatively high rental returns. These areas are typically located outside major capital cities, which often have expensive housing and lower yields.

Realestate.com.au recently released a comprehensive list of the best suburbs for rental yield based on its November 2019 to October 2020 data. Here are the top five suburbs with high-yield rental houses from each state and territory, according to the property website.

### Australian Capital Territory

 Suburb Median price Median weekly rent Gross rental yield Macgregor \$575,000 \$500 5.0% Holt \$600,000 \$530 5.0% Wanaissa \$615,000 \$550 4.9% Calwell \$610,000 \$525 4.9% Dunlop \$633,000 \$555 4.9%

Source: Realestate.com.au

### New South Wales

 Suburb Median price Median weekly rent Gross rental yield Broken Hill \$120,000 \$260 11.4% Wellington \$145,000 \$280 8.8% Cobar \$100,000 \$270 8.7% Condobolin \$180,000 \$250 8.3% Moree \$190,000 \$300 8.0%

Source: Realestate.com.au

### Northern Territory

 Suburb Median price Median weekly rent Gross rental yield Zuccoli \$209,000 \$530 7.3% Gillen \$430,000 \$520 6.6% Braitling \$450,000 \$550 6.6% Karama \$377,500 \$405 5.8% Woodroffe \$345,000 \$380 5.7%

Source: Realestate.com.au

### Queensland

 Suburb Median price Median weekly rent Gross rental yield Dysart \$110,000 \$250 11.5% Townview \$222,500 \$370 10.9% Mount Morgan \$100,000 \$200 10.3% Monto \$87,000 \$220 9.3% Sunset \$200,000 \$370 9.2%

Source: Realestate.com.au

### South Australia

 Suburb Median price Median weekly rent Gross rental yield Port Pirie West \$115,000 \$220 9.1% Bordertown \$163,500 \$245 8.7% Ridson Park \$130,000 \$190 8.1% Elizabeth North \$165,000 \$260 8.0% Elizabeth South \$165,000 \$251 7.9%

Source: Realestate.com.au

### Tasmania

 Suburb Median price Median weekly rent Gross rental yield Smithton \$230,000 \$260 7.1% George Town \$202,500 \$270 7.0% Bridgewater \$296,000 \$368 7.0% Ravenswood \$211,250 \$260 6.7% East Devonport \$262,000 \$280 6.4%

Source: Realestate.com.au

### Victoria

 Suburb Median price Median weekly rent Gross rental yield Nhill \$133,000 \$240 9.7% Stawell \$220,00 \$270 7.5% Kerang \$169,000 \$245 7.3% Morwell \$190,000 \$250 7.2% Ventnor \$601,000 \$855 7.2%

Source: Realestate.com.au

### Western Australia

 Suburb Median price Median weekly rent Gross rental yield South Hedland \$209,000 \$400 10.9% Newman \$227,500 \$475 10.6% Merridin \$130,000 \$270 10.0% Rangeway \$75,000 \$200 9.9% Boulder \$200,000 \$320 9.0%

Source: Realestate.com.au

## Is owning rental property worth it?

Just like any type of investment, rental properties have their own set of benefits and disadvantages. Here are some of them:

### Pros

Stability: All people need a place to live. That is why properties, including residential rental properties, are almost always on demand. The housing market may have its ups and downs, but it tends to be less volatile than other investments, including stocks.

Positive cash flow: Landlords can often use their rental income for paying off mortgage and other expenses of the rental property. Because of this, rental properties have the potential to generate a steady flow of passive income, especially if the income coming in is more than the monthly repayments and maintenance costs combined.

Tax benefits:  Residential rental property owners enjoy a bevy of tax deductions that allow them to maximise their return of investments. (See list below.)

Long-term investment: Overtime, the value of the rental property may go up, along with the rent, especially if the property is in a high-yield area. This means cash flow can also improve, leading to positive cash flow, which can then be used to finance more investment properties.

### Cons

Lack of liquidity: Unlike stocks, it takes a longer time to sell a property. This can put an investor at a disadvantage, especially if they need quick access to cash.

High entry cost: One of the biggest hurdles hindering many Australians in investing in property is the heavy financing involved. A deposit alone can cost in the tens to hundreds of thousands of dollars.

Ongoing costs: Investing in rental properties require ample planning and preparation because of the several costs involved. Mortgage repayments, council rates, maintenance and renovations expenses, and insurance are just some of the ongoing costs associated with owning a property. Therefore, it pays to have an investment strategy where the rental income outweighs all ongoing expenses.

Bad tenants: Dealing with bad tenants can be a nightmare for landlords. Not only do bad tenants cause emotional stress, their actions can also result in financial losses, especially if they regularly fail to pay rent or cause damage to the property.

## Is my rental income taxable?

According to the Australian Taxation Office (ATO), rental income is taxable at a marginal tax rate and must be declared in a person’s annual income tax return.

The table below shows the ATO’s marginal tax rates for 2020-2021, indicating how much a property owner needs to pay based on their rental income.

 Income threshold Rates Tax payable on this income \$0 – \$18,200 0% Nil \$18,201 – \$45,000 19% 19c for each \$1 over \$18,200 \$45,001 – \$120,000 32.5% \$5,092 plus 32.5c for each \$1 over \$45,000 \$120,001 – \$180,000 37% \$29,467 plus 37c for each \$1 over \$120,000 \$180,001 and over 45% \$51,667 plus 45c for each \$1 over \$180,000

Source: Australian Taxation Office

Property owners can also minimise their annual tax bills with a range of deductions. However, the ATO stressed that they can only claim deductions on a rental property during periods when it was tenanted or “genuinely available for rent.” Additionally, investors can only claim a deduction for the portion an expense that was used to generate income and they must present records to prove these expenses.

Here is a list of what rental property owners can claim as deductions.

### Rental expenses landlords can claim in the same income year

• Advertising for tenants
• Body corporate fees and charges
• Council rates
• Water charges
• Land tax
• Cleaning expenses
• Gardening and lawn mowing costs
• Pest control
• Insurance (building, contents, public liability)
• Interest expenses
• Pre-paid expenses
• Property agent's fees and commission
• Income protection insurance
• Repairs and maintenance
• Legal expenses

### Rental expenses landlords claim over several years

• Borrowing expenses
• Capital expenditure
• Depreciating assets
• Initial repairs
• Capital allowances
• Capital works

## What expenses will I be responsible for as a landlord?

Apart from monthly mortgage repayments, landlords need to take care of several ongoing costs to keep their rental properties in a habitable state. These include body corporate fees, council rates, insurance, and repair and maintenance expenses. Landlord also need to pay land tax, which vary from state to state.

If they do not want to manage the property themselves, they need to hire a property manager, which adds to their monthly expenses. Property owners also need to set aside cash for advertising to attract tenants.

## How do I know if I picked a good property?

Experts say that a good property can either make or break an investor. This is the reason why careful planning and due diligence are crucial when searching for the ideal investment property. Here are some indicators that the rental property you picked is the right one.

### 1. Location

A property’s location has a major impact on the rental demand, tenant quality, and rate of return on a rental property. If the property is in a high-growth market, rental price, tenant quality, and the property’s value will likewise increase. Some good indicators of a high-growth area include large and rising population, proximity to public amenities, vibrant job market, low crime rate, accessibility of public transportation, favourable taxes, and affordable insurance rates.

### 2. Condition of the property

When selecting a rental property to invest in, it is advisable to conduct a thorough home inspection to know if the property is in a sturdy condition and tenant-ready as repair and maintenance expenses can eat into an investor’s funds and can have a huge effect on cash flow.

### 3. Number of listings and vacancies

An area with a low number of listings and vacancies shows a strong rental market. Low vacancy rates also allow landlords to raise rental prices to boost returns.

### 4. Positive cash flow

A rental property should be able to generate a strong positive cash flow every month. This means the income a property generates is more than enough to cover everything that a landlord puts into it.

### 5. Potential for capital growth

Apart from cash flow, investors should be able to generate profit from the rental property. The most common metric used to determine profit is cash on return because it factors in how the investment property is being financed. Experts say a good rental property can make cash on return of about 8% or more.

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