Rental returns



From: Donna Larcos

I think I asked this once before but it
languished. How to people measure
their rental returns over time?
I.e. you buy a $100k property and getting
$8k a year rent (8% gross return). You
have borrowed the whole $100k at 6.5%.
Two years later the rent is $9,000. Do you
relate your rent to the original input to the
property i.e. your return is now 9% or the
increase capital value of the property
which is now worth $115K in which case
your "return" has fallen to 7.8%

Six years ago I bought a unit for loan
value of $128k and the rent was $180.
which was a return of 7.3%. Now the rent
is $210, loan is the same and I have
equity of around $50k which would
otherwise mean rent return has "fallen" to
6%. I suppose I prefer to look at what I
actually put in after tax of my own money
and what capital growth and net rental
return do I have. $2800 per year after tax
(much less now) for six years has turned
into $50k. Return on that? I've misplaced
my Texas BA35 solar but I think it is
significantly more say 20-25% p.a. This
was my worst performing property. How
do others think of their return?
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Reply: 1
From: Les .

G'day Donna,

I'm with you - I don't know what is the "right" way to do this, but it makes sense to me to base it on your input to a deal.

e.g. if you are able to negotiate the purchase of a $150k (in value) property for $120k, then I would expect your rental return would naturally be higher than someone who paid full price.

Conversely, if you borrow against this one to fund the deposit on another property, then your rental return would drop accordingly.

Again, I don't know if that is the "right" way to do it, but it makes sense to me.

I would think that if YOU understand it, then that is sufficient - that way you can explain your situation to a lender. If you tried to alter things to suit someone else's point of view, you could do yourself a dis-service.

But if there is a "right" way to do this, then it's probably worth knowing just so you can be on a level playing field, so I'll be listening too for any responses.

Thanks for posting the question - it's good food for thought,


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Reply: 2
From: Mike .

Hi Donna,

Every investment should be analyzed from the capital growth angle, rental return, and total return. Your total return is a reflection of the risk in the investment. The more borrowed funds you use (ie gearing) the higher is the total return on your own equity.

The property market and the rental market fluctuate differently. At times the capital growth roars ahead as it is doing in some markets at the moment, and the rentals won't keep up, so your rent return drops accordingly. But since capital growth makes up the major portion of your total return you shouldn't be too concerned.

As your property ages you might notice rentals stagnating or longer vacancy periods. A hard decision may have to be made to either renovate to make the IP more competitive with other newer properties or lease-option it on a long lease to make it more positive or sell it.

In conclusion, I like to track capital growth and rental growth separately as opposed to rental return which is a ratio of the rent to the property value.

Regards, Mike
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Reply: 2.1
From: Sergey Golovin


I'll say it right from the beginning – I am just guessing and I am not a qualified CPA.

We are probably talking about two or three different issues here.
1. Return on the amount borrowed (then) - $128K paid for the house (borrowed), rent $180 and return 7.3%.
2. Return on the amount borrowed (now) - $128K, rent $210, return 8.5%.
3. Return on the whole property (would be easier to imagine if I would bought it, right now as it is with all money borrowed): $128K+$50K=$178K, rent $210, return 6.1%.

Question is what do you do with other $50k worth of equities? Well, I do not know, use’m.

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Reply: 2.1.1
From: F. F.

For me I calculate rental return against the original purchase price of the property. I use capital growth to review my net worth status Ie value of assets - debt. For me both pieces of information are necessary and they provide an investor with the detail needed to check whether or not their wealth creation strategy is on track.
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From: Arthur A Worley

Hi Derek,

Both pieces of information are needed to track earnings and capital growth. However it is the relationship between the two that is important to gauge net earnings and wealth creation.

There is a computer package called SPSS for windows that is a stats package that is not too difficult to use that enables you you put in up to 19 variables to any equation. The results are an accurate representation of all factors. There is also a student version, that is not as sophisticated, that still gives accurate assessments.

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Reply: 3
From: John P

Donna I believe I have an XL spreadsheet model that covers this as well as C/Growth. Email me if you want a copy.
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Reply: 2.1.2
From: Terry Avery

My take on this is that the rent yield is based on your original purchase
cost so rent of $210 p.w. is 8.5% on $128K. I think of it as if I had put
the money in the bank, in say a term deposit, then the interest is
calculated on the original amount unless you compound the interest but with
a rental property you don't do that with the rent you tend to take it and
invest the excess elsewhere. So over time, as rents increase so does the
yield on your original investment. I also calculate the yield on today's
prices to check how it compares with the market yields and whether it would
be attractive to another IP investor.

The other aspect is the capital gain, that is also part of your return so
$50k cap gain is a 39% gain. You would need to annualise that to get the
annual return figure. To get the total return is probably a bit more complex
but I think you would add rental yield and cap gain to get the total gain.
The shortcoming with what I have said above is that the calculations are
based on the purchase price but the real return is based on how much of your
capital was used to purchase the property so the returns would be much
higher. As you didn't indicate the length of time or purchase costs you will
need to research how to do that yourself.
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