How to make good return on an investment property

A rental property is a great way to earn extra income and bulk up your investment portfolio. In this guide, you'll find everything you need to know about rental properties, from tips on how to get the best property investment to increasing rental income.

Rate of return on investment property

The expected return on rental property depends on various factors like location, type of property, and the current state of the rental market. Take a close look at your rental yield (the rental income minus the costs of your investment property) to figure out your yield percentage. The higher the yield percentage, the better your return on investment will be.

According to Statista, a consumer and market data provider, the average rental yield of houses in Australia during the third quarter of 2021-2022 was 2.7% in Sydney, and 5.67% in Darwin which was the highest across all capital cities.

The best rental returns in Australia average approximately 7% to 8% rental yield in capital city suburbs. Meanwhile, in regional areas, a high rental yield is around 8.5% to 11% for units and 12% to 13% for houses. Generally, a good return on investment property is somewhere from 5% to 10%.

Keep in mind that every suburb generates different estimated rental yields. A rental yield of lower than 5% can also be considered good depending on where your rental property is. Some states or territories are better markets for rental properties than others.

Take note that there is no set number on what you should be earning. A high rental yield doesn’t always mean good returns. Sometimes, a high rental yield means slow capital growth potential. The right return on investment depends on what risks you take as an investor, and what you want out of your rental property.

Tips on maximising your returns from property investment

Finding and managing a rental property is a tall order. To make things easier and ensure your investment’s success, we’ve listed down top tips on maximising your returns.

Follow these recommendations to get the most out of your rental property.

Look into different locations

The location of your rental property could make or break your investment. Choose a place that is popular with renters and primed for capital growth.

Before shopping around, look into the local market trends and see what type of property investment is most profitable. Every suburb and city in different states and territories have different market data so it's vital to do your research beforehand.

Set a budget

Set a firm limit on what you’re willing to pay and stick to it. Although it’s tempting to go all out on an investment property, you need to make sure you can recoup your costs. Get a free suburb report or property report toget an idea of fair property value in the area you’re interested in. This will also help make sure you don’t overpay for your property investment.

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Find the right property

Your budget and investment goals are key to determining the ideal property investment for you. If you’re looking for steady rental income, a house or an apartment unit might be the best fit. Alternatively, you can choose a holiday rental if you’re not keen on becoming a landlord fulltime.

Get the structure right for your investment loan

Before you do anything else, see an accountant and make sure you have worked out the right investment structure. Understand how you can split debt between properties and how to divide ownership if you have investment partners.

If you don’t structure your investment properly, you might miss out on key tax advantages.

Choose the right tenants

Choosing the right tenants is essential to any rental property. Do a standard background check and interview potential tenants before they sign the lease. You can also ask for references in the rental application. Don’t forget to check the employment details and their guarantor to have the assurance that they can make their payments on time.

Maximise tax benefits

Maximising profit on your rental property investment can be achieved through tax deductions. You can claim a number of rental expenses such as:

• Borrowing expenses
• Capital expenditure
• Capital allowances
• Capital works
• Depreciating assets
• Initial repairs
• Improvements

Find out if you can claim these deductions on your investment property and boost your rental income by consulting an accountant.

When you have a rental property, making small but smart improvements can help increase your return on investment even more. Read on to learn more about how you can improve your rental yield.

The best ways to increase rental income from your rental property investment

Give renters a little extra

Add value to your rental properties by installing appliances like a dishwasher, reverse-cycle air conditioning and a security system. You can also add some furnishings to make it more attractive for short-term renters. It’s often the little things that make the most difference.

Install solar power

Make your property more attractive to potential tenants by adding solar panels. Solar power helps tenants save on their power bills—who wouldn’t want that? You can charge a bit extra in rent for this feature too. This a great and green way to help your tenants save money while increasing your profits.

Conduct regular inspections

Nothing kills rental value quicker than letting the property get run down and shabby. Broken fixtures and appliances are of particular concern to prospective tenants. To maintain rental value, be sure to have relationships with trustworthy tradies who you can rely on to fix any problem that may come up.

Increase storage

Everyone loves extra storage, be it inside or outside the property. Install a shed in the backyard, add a storage area in the garage, or create a built-in wardrobe for convenience. Adding extra storage to your rental property investment is an easy and inexpensive way to increase value and attract more tenants.

Renovate periodically

Occasional cosmetic changes are essential to keeping your property attractive in a changing market. Tastes change and your property needs to change with them.

It doesn’t have to be a total renovation. Simple cosmetic touch ups like afresh coat of paint, or updated flooring and window coverings can do wonders. Improving the kitchen and bathroom can also be a worthwhile investment.

Offer long-term leases

Being regularly forced to move is one of the big hassles of being a renter and it costs money too. For this reason, many tenants are willing to pay a bit more for the security of a longer-term lease.

Make your property pet-friendly

Many landlords refuse to allow pets which means that pet owners are often willing to pay a higher price for the limited number of properties that do allow their furry friends. Pet owners can be great tenants and allowing pets can give your property a real point of difference.

Increase rent strategically

The art of setting rents is to raise them periodically without driving out your tenants and suffering vacancy. This involves understanding exactly what is available nearby and the cost and hassle of moving for the tenant.

If you study the market closely, you can ensure you are extracting the maximum price for your property without increasing vacancy.

Review your investment loan periodically

Lenders often change their investment property interest rates depending on market fluctuations. Keep an eye out and benchmark your loan to market to see if there’s a better deal available. A small difference in interest rate can add up to a lot over time.

For instance, on a 30-year property investment loan of $450,000, if you find an interest rate just 20 basis points cheaper than your current interest rate, may end up saving you an estimated $22,500 over the life of your loan (calculation based on a 25 year loan term). To see how much you can save on your loan with a cheaper interest rate, use our free mortgage calculator.

Take the simple steps above, and you will be well on your way to maximising returns from your investment property.

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FAQ

What is the expected return on an investment property?

The expected return on investment property depends on a variety of factors. However, a good rental yield would typically be around at least 5%. Anything beyond 10% would be considered a great return on investment.

What are some minor changes I can make to increase my investment property returns?

Quick and minor options to increase returns may include increasing your rent, even by as little as $10 a week (ensure you do not breach an existing tenancy agreement if you are considering this option), negotiating a lower interest rate on your investment home loan, or even talking to a tax accountant to identify any areas of your investment you could claim to decrease your taxable income.

Can investment loan interest rates impact my investment property returns?

The interest rate on your investment loan can have a significant impact on the returns from your investment property. The higher your interest rate, the higher your loan repayment, which results in a lesser return. Regularly review your investment loan interest rate, negotiate with your existing lender if you can to achieve a lower interest rate, and if not, potentially consider refinancing to a lender that can offer competitive investment loan rates, like loans.com.au.