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WHAT DOES RENTAL YEILD MEAN TO AN INVESTOR?

Rental yield is a measure of how much cash (or rental income) your property generates each year, as a percentage of the property value.

The property investor dream is to secure a high rental yield property, in a location that delivers large capital gains, combined with low management and maintenance costs.

This means, rental yields are not the only consideration when purchasing an investment property, but still a very important one.

Calculation

Rental yield is calculated as a gross percentage and generally calculated before expenses are deducted. Gross rental yield is commonly used.

It is simple to calculate and allows you to easily compare properties with different values and rental returns to assist when considering different investment options.

Gross rental yield = Annual rental income (weekly rental income x 52) / property value* x 100

For example:

The property purchase price = $400,000 and weekly rent = $350

(350 x 52) / 400,000 x 100 = 4.55%

While the gross rental yield is a simple calculation, it’s important to note that it doesn’t take expenses into account. A property may have a high rental yield, but may also have high expenses, making the rental return low when these are taken into consideration.

If you do want a more precise calculation, you will need to know (or estimate) the total expenses for the property, including both purchase and transaction costs (property purchase price, stamp duty, legal fees, pest and building inspections, any startup loan fees, etc.) and annual costs such as vacancy costs (lost rent and advertising), repairs and maintenance, managing real estate agent fees, home and contents insurance, strata levies (if applicable), rates and charges etc.

Net rental yield = (Annual rental income – Annual expenses) / (Total property costs) x 100

A high yield means good cashflow for investors, which helps to improve your return on investment.

* Either purchase price or current market value

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4 OUT OF 5 ARE UNDERINSURED

An alarming 80 per cent of property owners are underinsured according to data from the Insurance Council of Australia.

While some may underinsure their property on purpose, believing that an event may never happen to save on costs; there are many home owners and investors that are unaware that they may be underinsured.

It is important to regularly review your insurance policies to ensure that you are adequately covered, and the policy terms are still the same.

When reviewing your cover consider the following:

Building cover

  • Do not include the land value in the insured amount.
  • Have you made any renovations, alterations or additions to the property? These should be factored into the sum insured.
  • What is the current replacement building cost? This is not market value, but the current cost of building the same premises again. This value needs to reflect the costs involved in restoring the property to its existing condition, considering current building standards and codes, and factoring in rising costs due to inflation, labour, etc. To get an accurate estimate of replacement costs, we recommend that you speak with a quantity surveyor or builder or there are online building replacement calculators.

Contents cover

  • Have you added to your possessions, fixtures and fittings?

Landlord cover

  • Has the way you rent out the property changed? For example: changed from short-term to fixed-term, or vice versa.
  • If the type of lease has changed, it is imperative that the type of insurance policy is changed too, as different policies suit different situations and landlords may find themselves inadequately insured for their needs.
  • Has the rent increased? If the weekly rent has increased significantly (for example, exceeds $1,500 per week), you may need to contact your insurer and discuss if this affects your policy in any way?

If disaster strikes, landlords can find themselves in financial trouble if they have failed to update their insurances. Take the time now to review your insurance cover.

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SHORT TERM AND HOLIDAY RENTAL REGULATIONS

You may have heard about the new planning regulations coming into effect for short term and holiday rentals (STHR) in NSW. The latest update is that the proposed legislation has been passed by parliament but has not yet been enacted.

 

At this time there is still not a great deal of detail available with regards to the legislation itself.

 

The information that is available to us right now indicates the following:

 

  • The NSW government will establish a single definition for what constitutes Short term or holiday rental accommodation.
  • When the host is present on-site overnight, STHL will be allowed as ‘exempt development’ all year. This means anyone renting a room in their house or part of their property, such as a granny flat on a short term basis will be allowed to continue to do so without a cap.
  • When the host is not present on-site overnight, STHL will be allowed as ‘exempt development’ with a limit of 180 days for hosts in Greater Sydney and 365 days in all other areas of NSW. This will mean that full time short term rental properties will have a 180 night cap imposed. We are currently working to find out if there is any kind of application or DA process that will allow for our owners to be exempt from this cap. If there is not, then we will be recommending to our owners that we utilize a combination of short and long term rentals throughout the year, which many of our owners already do.
  • Councils outside Greater Sydney will be able to decrease, through their local environmental plans, the 365 day threshold to no lower than 180 days per year and
  • Certain planning rules will apply to properties on bushfire prone land.
  • There will be changes made to the Strata Schemes Management Act that will give strata committees the power to decide if short term rentals will be permitted or not. We encourage all of our owners to keep an eye on their strata notifications and attend strata meetings to stay up to date and ensure that you have your say on any updates to your strata by laws.
  • The NSW government will introduce a code of conduct for STHR that hosts, agents, platforms and guests must adhere to. They will also establish a register and online database that will record any problem guests and hosts that are banned from using accommodation platforms. We think this is a great initiative that will give us an extra tool to help us ensure that we continue to get the highest quality tenants and guests for our owners.

 

For further information on what we have outlined here please visit Fair Trading Website and Planning NSW website.

 

This new policy has not yet been implemented. We will be keeping you updated as and when more information becomes available to us. Feel free to send us an email if you have any questions on how these changes will affect your property.