Four financial terms every rental owner should know
Owning an investment property is a little like running a business. There’s incomings, outgoings, and tasks that need to be managed, with the ultimate aim to enjoy an ongoing income or capital gain.
And just like any business there are some metrics involved that relate to your investment property’s bottom line.
With that in mind, here are four financial terms every rental owner should know…
Rental yield
Rental yield is the difference between the income you derive from your rental property versus the costs involved in owning and managing it.
It’s a figure commonly used by property investors to determine whether the property will serve the financial purpose they hope for.
When it comes to calculating rental yield, there are two different ways: gross yield and net yield.
Gross yield simply looks at the gross rental income you receive in one year versus the property’s market value.
Nett yield is a more accurate figure that gauges the annual rental income against all outgoings, including mortgage, insurance, rates, maintenance, and property management fees.
As for what is a good rental yield, there’s no clear-cut answer and it really depends on your personal investment strategy.
But by way of example, in early 2024 realestate.com.au reported the average gross rental yield for all Australian capitals was 3.8 per cent for houses and 4.9 per cent for units.
Gearing
Rental yield brings us to another commonly used term that’s discussed in regard to investment properties: gearing.
Rental properties can either be positively or negatively geared.
If your rental property makes an income after all expenses, it is positively geared.
If it makes a loss, after all expenses it is considered negatively geared. This negative gearing then creates a taxable loss, which can potentially be offset against other income, such as your salary, to provide tax savings.
Capital gain or loss
If your investment property increases in value and covers all your costs when it comes time to sell, it enjoys a capital gain, and that’s something many of us hope for when we purchase a property.
On the flipside, if your property sells for less than it has cost you, then that’s considered a capital loss.
And both scenarios have tax implications.
As the ATO explains: ‘A capital gain or loss is the difference between what it cost you to obtain and improve the property (the cost base) and the amount you receive when you dispose of it.
“If you make a:
- net capital gain in an income year, you’ll generally be liable for capital gains tax (CGT)
- net capital loss, you can carry it forward and deduct it from your capital gains in later years.”
Capital gain and loss is quite nuanced, so it pays to consult your accountant or financial advisor, but in the interim, the ATO has more information here.
Depreciating assets
Depreciating assets allows you to claim back the cost of purchasing an item for your rental property over several years.
And again, this is fairly nuanced, with the ATO noting the item in question cannot be part of the structure of the property.
“Depreciating assets have an effective useful life and are reasonably expected to decline in value over time.
“For depreciating assets costing more than $300, you can claim deductions for the decline in value over its effective useful life. Examples of such assets in your rental property or holiday home include:
- floating timber flooring
- carpets
- curtains
- appliances like a washing machine or fridge
- furniture.”
The bottom line
There are a raft of financial implications to consider when it comes to purchasing and owning an investment property, which is why it pays to consult a good accountant or financial advisor.
Each year, you will also need to provide information for your investment property as part of your annual tax return, so it’s important to keep records of all incomings and outgoings associated with the property.
How we can help
Our experienced property managers pride themselves on establishing great relationships with both rental occupiers and owners.
We manage every property as if it were our own and you can learn more about our property management services here.
Alternatively, if you are looking to rent a property, you can view the properties we currently have available here.
