Measuring ROI in Your Property Investment Portfolio
Figuring out the Return on Investment (ROI) for your property can be determined using one of two methods:
- Cash (or cost)
- Finance (or out of pocket)
With so many variables, including maintenance, repairs and leverage, it’s a calculation that requires expertise. If you’re not an accountant or financial planner and you’re investing in property on the Gold Coast or other high growth areas throughout Australia, at the very least, you need to know how to read a financial statement and understand how your investment is performing.
The simple way of working out your property ROI is paying for it with cash. With no debt, the ROI is a simple calculation:
Divide the annual return by the total investment
If you purchase your property for $500,000 and the annual rental return is $40,000, your ROI is 0.08 or 8%. That figure is gross, so with maintenance, taxes, insurance and other costs, your return is probably closer to 5%.
This is simple enough to understand, but you may need advice on how to calculate all these figures and exactly what they mean in terms of performance.
When you borrow money to buy an investment property, there are quite a few more numbers and calculations to figure out. Australians are keen property investors because of a tax environment that encourages property purchasing and actually rewards investors over time by borrowing money. Borrowed money has a ripple effect throughout the economy, creating wealth for shareholders of lending institutions as well as the borrower.
Let’s start with the $500,000 property again, returning $40,000 per annum where you’ve borrowed 80% of the property cost. You now have $100,000 in equity and a loan to repay at let’s say 5% – for now. That requires monthly repayments of $3,953.97 on a 15 year loan, putting you in the negative gearing category.
If you want to positively gear at a meaningful rate, a 30 year loan will require repayments of $2,684.11 to pocket $7,790.68 a year.
If you’re negative gearing, you’re losing $7,447.64, which requires a high income to offset taxes. However, the return is likely to be greater over the longer term.
There are still more numbers to consider using the finance method:
- Depreciation – changes in a suburbs demographics, market slumps, wear and tear on the property itself
- Appreciation – market growth and ongoing investment in maintenance and improvements
- Changes in interest rates – refinancing your loan over time will change your repayments, as will a rise or fall in official and lender interest rates
The total equity you have invested in a property will depend on a variety of factors that you need to understand if you’re building a property investment portfolio.
Consulting a financial planner and leveraging property investment services is the first step in defining your goals.
Navigating the Numbers
If you’re looking for property investment advice, contact Astute Investments for a free introductory consultation. We can help from establishing financial goals through to investment and management of your property assets.