Investment Property: The Wonderful Income Stream called “Rent”
Investment properties have tenants and tenants pay rent. Hooray! If you are the tenant, this is not so good, it is often referred to as “money down the drain!” However, if you are the landlord this rental income now helps you pay for the mortgage on your investment property. Here are some thoughts about rental income.
Investment Property Rental Income
- Calculate your rental return. This is calculated as the ((Rent x 52) / The value of the house) x 100. So if the rent is $450 per week and the house is worth $420,000. The rental return would be $450×52 = $23,400 divided by $420,000 = 0.0557 x 100 = 5.57%. This means you can compare what sort of return on investment you will get from rent alone.
- Don’t forget that you also get tax deductions which will increase the effective return on investment.
- Rent doesn’t stay the same, you can expect the rent to increase every year that you own the property. If you are initially negatively geared, it may only be 5 -10 years before you have enough rent to not only pay the interest but start paying the principle down all on its own.
- Check the vacancy rate in your area. It’s quite normal in Australia for a suburb to have a vacancy rate of 1% – 2%. This just means that if your tenant leaves there might be a week between the next tenant arriving. In other parts of the world the vacancy rate can be super high. Industrial and commercial properties also usually have a higher vacancy rate. If your property is likely to be vacant 26 weeks a year, perhaps you should be buying somewhere else.
Article by James Parnwell
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