September quarterly figures show that Perth is generating one of the highest rental “rate of return” (ROR) or “yields”, across the Nation.

 

 

 

A helpful tool to use when considering a suitable rental rate is to consider the rental “rate of return” (ROR) or the rental “yield”.

The rate of return is calculated by dividing the annual rent return by the sale value of the property. For example, a home rented at $480 per week ($25k per annum) which is valued at $600k, has a rate of return just below 4.2%. The same calculation could be used in reverse to estimate a sale price for a property.

Traditionally Perth prices have provided a rental yield of 2% to 3.5% with an investor often prepared to accept a lower return if they can see a future higher capital growth to compensate.

We are currently seeing the rate of return creeping up to levels around 4.5% to 6%. This reflects the strong demand for rental properties and low vacancy rates. It also shows that house and unit sale prices are lagging and that there will be increases for some time.

Some recent sales handled by our office have shown some great rates of return. For example, an investment property recently purchased in Success generates an annual rent of $25k, giving the purchaser a return of 4.7%. A Subiaco property sold for $579K with a rate of return of 4.3% which may suggest that the rent could in fact be increased.

It should be noted that some properties are still suffering from lower returns due to the effects of COVID and it will take time to adjust. We continue to see owners fearful of losing the tenant if the rent is increased without remembering that rents dropped 20% to 30% from 2013 to 2020 and there is room for catch-up.