Understanding Rental Yields in Australian Property Bonds

The Australian property market is booming. With real estate valuations continuing to rise in major cities like Sydney and Melbourne, investing in Australian property looks like a safe and lucrative bet. 

However, what if you’d like to invest in residential or commercial real estate in Australia but you don’t have direct access to the market? You might want to look to Australian property bonds for the high-yield returns you’ve been seeking. 

What Are Property Bonds in Australia?

Before we discuss the differences between rental yield and ROI, let’s look at exactly what property bonds in Australia are. 

A property bond is a financial instrument linked to another asset like real estate. You’ll often find them issued by developers or investment firms as a way to fund projects. Typically, they offer a fixed rate of return over a specific period, and they’re known for consistently beating the market. Returns on Australian residential property have averaged 8% over the last decade, and unlisted commercial property has averaged 9% over the same period.

Since property regularly outperforms other methods of generating passive income, property bonds are gaining popularity in the Australian market. Imagine sitting back and watching your property investment in Australia return more than 5% per year without you even having to lift a finger. 

Your investment works like a loan to the bond issuer, so you can receive rental income or profits from the development without having to do any property maintenance yourself. If you want to understand how to determine if a property bond in Australia will work for you, you need to understand how to calculate the investment.      

Understanding Rental Yield in Your Property Investments

Understanding rental yield is incredibly important to the success of your property bond investment. This measure represents the annual rental income you would receive as a percentage of a property’s total value or purchase price. The rental yield is a useful metric when you want to calculate your investment in Australian property bonds because it gives you a good idea of the kind of cash flow you can expect.

To calculate investment potential, typically, two methods are used—gross and net rental yield. 

The gross rental yield is calculated before taking any costs, such as fees or maintenance, into account, while the net rental yield is calculated after subtracting those costs. 

To calculate the gross rental yield, we’d take the total annual rental income divided by the property value and multiply that by 100 to receive a percentage. Similarly, the net rental yield will use the same formula but subtract the cost from the annual rental income before dividing by the total property value.

For instance, let’s say a property is valued at $600,000 and generates $30,000 in rental income each year. $30,000 divided by $600,000 gives us 0.05, which we then multiply by 100 to obtain a gross rental yield of 5%. If we had $5,000 in costs during the year, we would subtract that from the $30,000 and then divide by $600,000, which would give us roughly 4.17%. 

This is just one example, and there is a lot of variation in the Australian market. Some factors that could influence your rental yield are the property’s location, the type of property (house, office, or apartment), and even the efficiency of the property management company. If they’re on top of their game and you’ve invested in a high-grade property bond, you should have minimal fees and maintenance to worry about. 

How to Calculate ROI in Real Estate Investments

Now, the return on investment (ROI) on your Australian property bond is different than your rental yield. Instead of merely looking at how much income is being generated from rents, we use the ROI to look at the overall picture of how well your investment is performing. 

When calculating ROI for real estate, you’ll usually take your net profit divided by your total investment and then multiply that by 100 to get a percentage. For example, if you bought a property for $500,000, spent $50,000 on renovations and $10,000 on closing costs, and then sold it for $600,000, that would give you a net profit of $40,000. Divide that by your total investment of $560,000, and you’ll end up with 7.14% ROI.

Factors Affecting Rental Yields and ROI in Australian Property Bonds

As with any investment, there’s much more to it being profitable than just calculating the ROI, and the Australian property bond market is no different. There are plenty of things to consider that can affect your returns both initially and during the life of your holdings.

The most obvious of these is location. Areas in high demand like Sydney, Brisbane, and Melbourne mean your rental yields will increase as rents increase. There’s also the type of property your bond is attached to. For instance, apartments typically cost less but have higher rental yields, while houses have a higher initial cost but tend to do better with capital appreciation over time. 

There are also government policies, tax incentives in particular regions, and general market trends to consider. When interest rates rise, as they have done in recent years, this tends to dampen a rise in property prices as borrowers aren’t able to take on as much debt. On the other hand, this means that rent prices usually increase.

Market Trends and Their Impact on Property Investment in Australia

For your property investment in Australia, we've seen a few trends that can affect your rental yield and ROI. 

There is a fair amount of migration happening in the country now, especially among international students and workers, which means demand for rentals in cities is going up. With higher demand comes higher rental yields. 

There are also opportunities in secondary cities, as residents look outside the city center for lower rents or cheaper housing. However, the growth in these areas signals long-term capital appreciation. As interest rates stabilize and even come down, you could be well-positioned to receive a healthy return in a few years.

Maximizing Your ROI in Property Bonds

To maximize your ROI in property bonds, you’ll first want to choose to invest in a high-growth area. This will ensure an increase in your rental yields and ROI in the long term. When you calculate your investment, be sure to include all of your costs to get an accurate number of what you can expect to earn. 

What's more, things can change even after you’ve invested. It's a good idea for you to be active with your investments, stay up to date on market trends, and check on your portfolio's performance.

Any strategy to maximize your ROI would not be complete without thinking about how to mitigate risks. Make sure you do your due diligence and understand the terms of your property bond as well as the market. Working with reputable advisors can make this easy.

Final thoughts

Australian property bonds are a great option for growing your wealth, but keep in mind the strategies we’ve mentioned here for calculating ROI on real estate, your rental yield, and mitigating your risk.

For more individualized insights into how you can see significant growth in your portfolio through the Australian property bond market, Platinum Property Club’s is here to show you where your money can best be put to work.

Reach out today.