Important Formulas for Property Investment in New Zealand
Navigating the property investment landscape in New Zealand can be intricate. To make informed decisions and assess potential property ventures accurately, it’s vital to understand some crucial formulas. These formulas will not only give you a better grasp of the market’s dynamics but will also aid in maximising returns on your investments. Let’s dive into these essential equations:
- Gross Yield
- Formula: Annual Rent / Purchase Price x 100 = Yield%
- Importance: The gross yield helps you understand the annual return on your investment compared to its purchase price. It’s a basic metric to gauge how effective a property is at generating rental income.
- Usage: Investors use this when comparing different properties to determine which provides better rental returns. They also compare it to the current mortgage rate to give a guide as to whether the property will cash flow or not.
- Net Yield
- Formula: Annual Rent – Expenses / Purchase Price = Net Yield%
- Importance: Unlike the basic yield, net yield considers operating expenses, providing a clearer picture of your actual returns.
- Usage: It’s used when you want a more realistic view of your potential income after deducting associated costs. It is often used when investing in apartments and commercial property.
- Reverse Yield/Capitalisation Rate
- Formula: Annual Rent / Gross Yield = Purchase Price or Value
- Importance: This formula determines the purchase price or value of a property based on the desired yield and annual rent.
- Usage: Helpful when evaluating what price to pay for a property to achieve a particular yield.
- ROI (Return on Investment)
- Formula: Profit / Initial Investment x 100 = ROI
- Importance: ROI provides a percentage-based measure of the profit from an investment relative to its initial cost.
- Usage: It’s used to assess the performance of different investments or to gauge the effectiveness of particular property improvements.
- Cash & Capital Growth Return
- Formula: Profit + Capital Growth / Initial investment x 100 = ROI
- Importance: This variation of the ROI formula includes capital growth, offering a comprehensive view of the returns.
- Usage: Especially useful for long-term property investors in New Zealand, considering both rental income and appreciation
- Mortgage Payment Per Annum
- Formula: Total Lending x interest rate = Yearly interest Paid
- Importance: Helps determine the annual interest payment on a loan.
- Usage: Useful for budgeting and forecasting annual expenses.
- Equity
- Formula: Property Value – Mortgage owing = Equity
- Importance: Equity reveals how much of your property you actually own versus how much is still under the mortgage.
- Usage: Evaluating the strength of your property portfolio and understanding your net worth in the property sector.
- Usable Equity
- Formula: Equity x LVR = Usable Equity
- Importance: Shows the portion of your equity that can be used as leverage for additional property purchases.
- Usage: Especially relevant for investors in New Zealand looking to expand their portfolios by tapping into their existing property’s equity
For those keen on diving into property investment, it’s essential to have a grasp of these formulas. They form the foundation of smart investment decisions. If you’re looking for more insights and guidance, consider attending a webinar or masterclass by Wealth Mentor. We aim to illuminate the path to successful property investments tailored to the unique market conditions of New Zealand. Check our events page for more details.