How to work out the return percentage on an apartment?
SUMMARY:
The simplest way to figure out your net return per year is:
Income - expenses ÷ by the price you paid = your rental return in a percentage per year.
To figure out what return you will be getting on your apartment per year is done through a simple equation. Your net income per year (incoming earnings minus expense) divided by the price you paid for the apartment equals your nett return on a yearly basis on your purchase.
You do need to be aware of a few things though, when working out your income on 50 weeks of the year opposed to 52 as there may unexpected costs like vacant tenancies or maintenance that needs to be addressed.
Allow for agent fees when working your income too, this means minus this amount off your rent. Allowing for Body Corporate and rates need to be considered too.
TRANSCRIPTION:
Good day, Andrew Murray here from the Apartment Specialists talking about how you can get a net return percentage on your apartment.
You hear all these investors talking about I get 6% return or I get 7% return on an apartment and how that return is so much better than putting your money in banks.
What I'm talking about today is how you actually get that return on your apartment or how much you want to pay to get the right return you're looking for when you're looking for an apartment.
You can see here you've got the pretty simple equation, which is the net income minus expenses divided by the price and that's the price you're willing to pay, or the price you've paid for your apartment.
That equals your net return percentage and if you end up your net income as your income minus expenses. There are a few points you need to be aware of here. When you're talking about income, real estate agents use 52 weeks times the rent to calculate income, but in reality you'll have things like maintenance that turns up, things that need to be fixed throughout the year.
You have vacancy and things like that. When that happens, you should be really using 50 weeks to allow for vacancy. Another thing that people are not aware of is actually allowing for agent fees. In that case, that's when you've got a property manager looking after your apartment.
For example, let's just take it if your rent was $100 per week and the rental agent is charging 8% for the managing of your apartment, the actual rent you're getting is $92 per week, not $100. That's how you'd actually calculate your return. Then you're looking at expenses and I mentioned this earlier and your expenses are your body corporate fees and your rates.
Here, you're getting a net income which is 50 weeks times the rent which is either the figure that's coming in, and if you want to keep it simple, or you minus those agency fees divided by the price, then you pay and that equals the net return.
What I'm going to do is go through a basic example here, because it does seem a bit confusing for a lot of people. If we go through it here, I'll go to a different page. I've just done one for you which I'll take you through. We're going to talk about an apartment here that was purchased for $200,000. I'm using round figures just to make it simple. You've got the rent and I'm using 50 weeks times $400 per week income equals $20,000 per year income.
You have your expenses. Now expenses, $4,000 here is for your body corporate fees and $1,000 for your rates which equals $5,000. This makes your net income, the income you're receiving minus your expenses which equals $15,000.
When you look at the actual equation that I mentioned earlier which was this one here, net income divided by price equals net return. So $15,000 divided by $200,000 which is the price you paid or you're willing to pay, equals 7.5% net return. You can say you're getting a 7.5% net return on your apartment each year which is fantastic.
Anyway, I hope that helps.
If you have any questions about computing the return percentage of your apartment,, flick me an email at [email protected] or call +6421 424 892 and I’ll be happy to help you with your queries.
Cheers!