MID aspires to change the way Australians invest in property by unlocking property investment techniques used by professionals, combined with developing the technology platform necessary to deliver an understandable and user-friendly application for all property investors. To that end, we have launched the MID Standard Investment Property Analysis Application™ that will be offered absolutely free.
We intend to break down boundaries and will continue to develop new and innovative features that will be more accessible and customisable for all property investors.
What is my return on investment?
A smart investor will clearly understand what they are getting into. Our tool can help you calculate your return and understand whether you will make or lose cash from your property investment decision. Some of the questions that MID™ helps you answer include:
Rental Yield is a measure of the percentage of rent you will receive from a property less unpaid rent and vacancy, compared to the value of your property. Rental Yield is important in establishing an investment property’s income potential. Depending on whether your strategy is able to obtain high levels of income or capital gains will determine the importance of this measure. A high rental yield does not mean that the property is profitable. There are a number of expenses that must be considered that may cause the property to generate negative cash flows(refer to "Positive or Negative gearing?" for more information about positive and negative cash).1
Capital Gain is the increase in value of your property over the original price that was paid for your property. For many properties, the Capital Gain is the primary source of value in investing in real estate although rental yield is also considered a main driver of value. Pay close attention to both of these value drivers.
Capital Gain is based on your property value growth rate that you will have assumed. Therefore try to experiment with this assumption to make sure that the growth rate is realistically achievable.
Ensuring healthy Capital Gain in the future is all about the initial purchase of your investment property. You can optimise your Capital Gain by purchasing your property at a value that is lower than the market value and/or purchase a property in an area that you think will increase in the most value during your investment period. The higher the Capital Gain, the more money you will make. 2
The Return on Deposit is a measure of the total return (i.e. your cash profit plus capital gains) over your initial deposit that you paid to obtain a mortgage. This is a meaningful way of measuring the return relative to the cash that you provided at the inception of your purchase.
You can increase your Return on Deposit by either increasing your profit and capital gain or decreasing your deposit. However, decreasing your deposit will increase your loan and loan repayments and therefore your financial risk exposure - so be careful with lowering your deposit too much. 3
Cash profit is the cash that you will have in your bank account due to a profitable property investment. Cash Flow is derived from rental income minus expenses, interest and principle on the loan between the property purchase and sale date.
A consistent Cash Profit profile (excluding capital gains) may suggest that the property investment is profitable. A Cash Loss profile suggests that the investment is loss making and investors will need to contribute additional cash to meet the shortfall. This cash shortfall may be used as a tax deduction against other forms of income (generally known as a negative gearing strategy). Refer to "Positive or Negative Gearing?" for more information about property investment strategies. 4
The Return on Investment is a measure of the total return (i.e. your cash profit plus capital gains) over all your cash invested in your property which includes not only your initial deposit but your principal repayments and subsequent holding costs. This is the strongest return metric taking into account all elements on the financial aspects of your property and is the most useful measure when comaring against the returns of other investment types (such as stocks or bank deposit).
Increase your Return on Investment requires a delicate balance between how much equity to invest in the property against the the amount of debt which can lead to financial distress. Maximising your Return on Investment requires not only good management of your debt to equity mix but a good choice in suburb for capital gainst as well as good management of your costs.