Investment property is a popular form of income for many people who rent out rooms or second homes. Utilising the funds as a form of investment allows you to grow your streams of income and potentially retirement funds. However, investment properties have many outside factors that can affect the amount of income you might receive.
Whether you end up as a landlord by accident or purposefully seek out the job, there are many factors that can influence whether the role is right for you. In this blog post, we discuss the important points to keep in mind when deciding whether to buy, sell, or keep an investment property to aid your financial future and retirement funds.
What is Rental Yield and how does it help
Rental yield is used to measure the return on investment or ROI of a rental property. In other words, it’s the money you earn from owning the investment property. It can be determined by dividing the annual rental income by the value of the property. For example, if you receive €12,000 per year in rental income and bought your property for €300,000, you would receive a 4% yield.
A higher rental yield generally indicates a greater ROI, and therefore a better reason to keep an investment property. However, there are outside factors that need to be deducted from rent in order to generate the net rental yield.
These include:
- The property’s physical location
- Maintenance costs
- Potential periods of non-rent, or market conditions.
This means sometimes rental yield can be negative, and people don’t realize until it’s too late and you’re losing a valuable financial income potential.
The benefits of Capital Appreciation
Property has the ability to change in value over the years; when it increases, this is capital appreciation. It is the difference between the price of the property when it was purchased versus what it can be sold for.
If you bought for €200,000 fifteen years ago, and the current value is €250,000, then the value has appreciated by 25% or 1.67% per year.
It’s important to determine whether it has increased at a stable rate or if something has occurred recently for the value to rise. If the value will continue at this rate, you have to ask whether it is worth keeping or selling. Look at the other investments in your portfolio and compare their growth to determine whether this is profitable and will actually yield a higher return on your financial investment.
What is Opportunity Cost and how does it work?
Sometimes keeping a rental property can actually cause you to lose out on benefits you might receive from other investment types. Investment properties are highly illiquid. In comparison, the stock market has yielded average returns of 10% pa over the long term. Plus, you can get 40% immediate relief on pension contributions. This equates to an approximately 66% immediate return.
When looked at comparably to the above yield and appreciation figures, the stock market generates a higher return. This is because property investments are far less diversified and involve more ongoing costs. This doesn’t mean that property is always the wrong decision. Sometimes yield and appreciation on properties are extremely high. It’s important to look at your property’s specifics.
Present Financial Situation and Portfolio
Your current income and tax position may affect whether you should sell or purchase investment properties. If you’re already earning highly taxed income at the top rate in a day job then a property investment might not be the most tax-efficient way of accumulating wealth. It may make more sense to use vehicles like a pension to grow your wealth tax-free whilst you are working and re-consider a property for passive income in your later years when you need it.
The other investments in your portfolio will also affect whether a property investment is the right investment for you. If you have no other investments with very little savings and 2 residential properties, you’ve concentrated all your wealth in one asset type which is illiquid. In this case, it makes sense to sell the property and diversify your portfolio with other more liquid investment types. This gives you more flexibility as well as safety by spreading your funds.
Nurturing your Financial Investments
Investing in real estate can be a great way to diversify your portfolio to increase your finances and generate passive income. However, it involves high levels of risk and many responsibilities. Alpha Wealth can help you decide if keeping the property is best for you through individualised financial plans and advice from our certified financial advisors. It’s important to determine whether buying, selling, or keeping your investment property is best based on your own individual situation.
Contact us now to see if your investment properties are increasing your financial freedom.