What is a Good Investment Property ROI?

Return on investment (ROI) or yield, in the simplest terms, is the % you get back after taking into account costs.

As a general rule it can be calculated by determining the net annual return from the investment you make.

There are quite a few factors that can affect ROI, including initial investment costs, cashflow/income generated, and expenses…

Initial investment

How much money are you investing in total? Simply using the the purchase price/deposit with regards to the property can result in inaccurate ROI calculations. You should also include additional costs that are associated with the purchase including bank fees, solicitor fees, stamp duty etc.

Keep in mind that you can save an estimated ~$10,000 when you build as you only pay stamp duty on the land.

Income generated by your investment

You can use current data on average rental incomes generated by similar properties within a suburb to estimate how much rental income your property will be able to generate. In the case of a 3 + 2 dual key home for example, you would combine the average rental income from a 3 bedroom residence + average income from a 2 bedroom residence in that area.

You may find that the total rental yields from these two income streams are higher than for a single residence in the same area, but it is best to check rental appraisals before you make any assumptions. Understanding projected rental income can help you determine which type of residence (single/dual occupancy) will generate higher yield for similar purchase prices.

Income generated can also include capital gains depending on how you want to calculate your ROI.

Expenses

In calculating ongoing expenses for your investment property, you will want to include real estate fees if you outsource the management of the property, mortgage repayments, council rates, taxes, insurance, body corp, and ongoing maintenance fees such as garden maintenance.

Keep in mind that if you want to build a property with two rentable dwellings (and two income streams) that a duplex will require two sets of council rates to be payable, whereas a dual occupancy home is considered a single residence (although it has two seperate dwellings) and so only one set of council rates applies.

You will also want to consider vacancy rates- that is, weeks when your property is not occupied and not generating an income. Ensuring you choose to buy an investment property in a suburb with a strong demand for rental properties is essential to minimise these costs.

The ROI calculation

Once you have all this information, it’s a case of subtracting the expenses from the income, and then dividing this total by your initial investment amount. Of course, this it can seem a little overwhelming getting all these figures together if you don’t have experience with ROI calculations or don’t know where to get the information from to make your projections.

A great strategy instead is to get someone else to do the hard work for you! Look for properties that list the ROI %, and then review their calculations to make sure they haven’t missed any expenses listed here that would affect that final number.

So what’s a good number?

As a very general guide a 5% ROI would be a reasonable number, but see if you can find properties at a higher ROI if you can. For example, purchasing a property in Sydney or Melbourne can come with a much higher purchase price than a property in South East Queensland, and yet the rental income generated could be much the same. (Hint- there’s a reason QLD is a hotspot for property investment at the moment).

If you are curious about comparing ROI % rates between different areas check out our stock page for SE QLD investment properties and then compare returns to other areas you where are considering investing.