What Is A Good Capital Rate For Investment Property in Australia?
So your goal as an Australian resident or an Australian expat is to invest in a property that is based in Australia. You’ve heard of the term “capital rate” but are not quite sure what it means and are even less sure about “what is a good capital rate for investment property”.
It’s possible that you came across the term and thought “just what is a capital rate and what is a good capital rate for investment property in Australia?”
Capital rates are useful rates that can make a big difference to your options as a property investor, and there are plenty of advantages of using a capital rate and knowing what is a good capital rate for investment property.
In this article you’ll find out the answer to the question “what is a good capital rate for investment property”, so take a look to find out.
What is meant by capital rate?
A capital rate is a rate that Aussie expat property investors, or property investors living in Australia can use to work out their return on investment for an investment property. This rate is often used to make an estimate in terms of the return rates you might yield from multiple investment properties.
If you need to work out the actual, current property value, using a capital rate is a handy way to calculate it.
What is a good capital rate for investment property and what is a less favourable rate?
Generally speaking, when considering what is a good capital rate for investment property, a score of around 10%, or that falls between 8% and 10% is a reasonable capital rate.
Normally, a good capital rate does depend on the resident or expat investor’s perspective and financial situation in terms of what they are seeking to gain. However, it’s thought that a capital rate that is too high or too low (falling outside of the 8 to 10% margin) is classed as a less favourable rate.
How can I assess investment property and how is the capital rate useful?
So, to assess investment property as an Australian expat or resident, you can use the capital rate to find out how your chosen investment property’s return on investment compares with other properties located in the same area. You can also use the capital rate to learn whether the return on investment will match your financial situation and whether the property is a worthwhile investment.
The capital rate is therefore useful for making estimations, and if you want to work out what is a good capital rate for an investment property and learn what the capital rate is for your property, you can use a specific formula.
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Which formula is used to work out what is a good capital rate for investment property?
Now, the specific formula you can use to work out what is a good capital rate for investment property is: the net operating income / (divided by) the current market value. This will give you the capital rate for your investment property, which you can then compare with other properties to decide what is a good capital rate for investment out of all potential properties.
What is an example of how to use the formula to work out the ROI on an investment property?
The formula isn’t too tricky to use, but here’s an example of how to use it to work out the ROI on an investment property worth $850,000. You first need to know the net operating income of the property, which must factor in the rental income, the work required on the property and capital expenditure. In this example, the net operating income of the property is $100,000.
You then simply divide the net operating income of the property by the current market value of the property. So we divide $100,000 by $850,000, giving us 11.76%
As you might notice, this example is within the reasonable capital rate, exceeding only by 1.76%, meaning that this investment property might be considered a worthwhile investment from an Australian resident property investor or an expat investor.
However, in our example, our expat investor also has a lot of capital expenditure to consider. They have $50,000 in terms of the capital expenditure amount, so the 11.76% capital rate might be considered too high for this financial situation. The investor can therefore try to negotiate the purchase price and offer $800,000 instead of the valued amount.
Which factors influence what is a good capital rate for investment property?
Four of the critical factors that influence what is a good capital rate for an investment property are:
- Where the property is located
- What the interest rates of the property are
- What expenses are associated with the property
- What the property type is
What can you find out about a property by using the capital rate?
An Aussie expat or an individual living in Australia who knows what is a good capital rate for investment property in Australia can find out a few things, such as whether it is a good investment when compared with other properties of a similar size.
If the property is a smaller size, you can expect the capital rate to be greater. If the capital rate is greater for a small sized property, there is more risk involved with the property investment.
Why should I use a capital rate for investment property?
What’s more, if you know what is a good capital rate for investment property in Australia you should use a capital rate to anticipate any risk, such as whether there are any financial issues with the business of the tenant. But it can also be used to calculate opportunities.
You might notice, for instance, that a tenant is paying a rental amount that is higher than the usual market rent, and a capital rate can indicate whether you can expect this same rental amount is chargeable in the future.
And one final reason why you should use a capital rate for investment property is, if you know what is a good capital rate for investment property in Australia, you can check the market trends to identify whether they are increasing.
In the event that the capital rates are increasing significantly, it’s likely the market might be slowing. A property purchase in this situation is a good idea because, if you sell your property later down the line, you might make a good return.
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Good capital rates for investment property in Australia: Final advice
Using the formula in this article, you can calculate capital rates on investment property to determine whether the investment is worthwhile, but always remember that there are many factors (as mentioned) that can affect what is a good capital rate for investment property in Australia.
Keep in mind that the location, property type and expenses can affect the capital rates, and consider all of these factors when making your decision to invest in property in Australia as an expat.
What’s more, all the facts you need on property investment and mortgages are found at Odinmortgage.com, so explore our resources and other articles for more information before you make your investment!
What Is A Good Capital Rate For Investment FAQs
What is a good capital rate for investment property and does this indicate how long to capitalise on an investment?
Since a good capital rate for investment property is between 8% and 10%, knowing this can help you figure out how long it will take you to completely capitalise on an investment. If you’re aware that a 10% capital rate applies to your investment property, you can expect to completely capitalise on an investment in 10 years.
What should I consider when using a good capital rate for an investment property?
When thinking about what is a good capital rate for an investment property it’s important to recognise that the rate is an estimation only. You will find it difficult to be incredibly specific if you want to pinpoint what is a good capital rate for an investment property, because it is determined by a wide range of factors.
Is 3% considered a good capital rate for investment property?
3% falls outside of the margin for good capital rates for investment property. Most financial advisors and consultants suggest that a margin of at least 5% to 10% is a good capital rate for investment property, with 8% to 10% being a good rate.
What does it mean if the capital rate is very high?
Generally speaking, if the capital rate is very high, the investment is considered a greater risk than a capital rate that is lower, and if you have a lower capital rate, you can expect the risk to be lower.