Property Update October 200921-Oct-2009 Victoria's rental market remains tight, which is providing encouragement to investors to either enter the market or increase their residential property portfolio. If you are considering entering the residential property investment market there are some terms that you will see commonly used. To assist you to understand these terms we have defined them for you....
Equity. This is the difference between the property purchase price and the amount owed on the loan. In other words what you own not what you owe. Generally equity increases over time in line with capital growth and a reduction in the debt.
Capital growth. The term capital growth is often used in real estate to describe the increase in the price or value of a property. Capital growth is the annual compound rate of growth in the value of the property. For instance if you bought a house in Coburg for $538,500 and twelve months later it was worth $550,000, the capital growth is the difference between the two, $11,500, divided by the purchase price. This equates to 2.1 per cent over a year. Capital growth is also known as capital appreciation. For investment properties you should aim for the capital growth to increase 7-10% each year. whilst it would be nice for the property growth to increase in a smooth and steady fashion, there will be some years where the capital growth is lower and other years where it is higher. Note that this amount of capital growth will mean that the property value will double every 10 years.
Investment return . From a real estate perspective the term investment return is very similar to the capital growth figure. It is the percentage of change in value of the investment over a given period of time.
Gross rental yield. Gross rental yield is a term that is frequently used to compare the investment return on a property investment. To calculate the amount you divide the yearly rental income by the purchase price of the home. For instance the yearly rental income on a 3 bedroom house in Coburg is $20,000 and the median house price is $550,000 resulting in a gross rental yield of 3.6 per cent.
Nett rental yield. The nett rental yield is worked out in the same way as the gross rental yield. However the nett yield takes into account all of the properties expenses for the year, such as property management fees, maintenance costs, body corporate fees etc. To calculate the amount you calculate the yearly rental income minus the expenses. Then divide this amount by the purchase price of the home. using the example above if the expenses were $2000 per year, the nett rental yield would be $18,000 ($20,000-$2,000)/$550,000 = 3.3 per cent.