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Defining your search criteria - Rental return/minimum rental yield

The purpose of this article is to consider the required rental return when considering a property for real estate investment.

For some real estate investors, the cash flow they yield from an investment property will determine their ability to obtain that property in the first instance.

The old adage for rental return was to ensure the rental yield was 10% of the loan costs per annum.

For most real estate investors, the reality is closer to 7%.

Yielding a decent cash flow from your property investment is the key ingredient to investment longevity, and for some investors, is necessary from the outset.

As a general rule you want the highest rental yield possible, when compared to the loan value on the property.

For tax purposes, it is also worth noting that your rental income includes:

• Advance rent
• Late rent
• Bond money
• Insurance payments from loss of rent

A rental income does not include:

• Rent due but not paid
• Rent from a family member -- this is considered domestic in arrangement
• Exchange student payments -- as above
• Board payments

Those who co-own a rental property will usually divide the rental yield in line with their legal ownership -- i.e. 50/50 or 40/60 etc.

If you require your rental yield to cover the expenses of the property, you will need to ensure the weekly rental payments exceed the weekly repayments on the loan.

For many the only way this will occur is to buy a property in a high rental yield area for below market value or to wait until enough of the loan is paid off and rental incomes rise over time.

To bring the rental yield closer to the cost of servicing the loan on the property, most investors will have to spend a period paying off the principal on the loan -- rather than just interest only.

Taking out a very low loan can ensure immediate positive rental yield, but the property may still be negatively geared for tax purposes after adding up depreciation values and other costs incurred to the landlord in servicing the loan and the property.

My Knowledge Tips

• For some real estate investors, the cash flow they yield from an investment property will determine their ability to obtain that property in the first instance.
• As a general rule you want the highest rental yield possible, when compared to the loan value on the property.
• Those who co-own a rental property will usually divide the rental yield in line with their legal ownership -- i.e. 50/50 or 40/60 etc.
• To bring the rental yield closer to the cost of servicing the loan on the property, most investors will have to spend a period paying off the principal on the loan.

Source: Real Estate Investar