The concept is called a percentage yield or a return and though it sounds a little complicated to calculate, it may take a lot of guesswork out of the market.
When youve found a place you like, try to ascertain what weekly rent it would achieve on the open market. Multiply this by 52 to get an annual rent.
For example, a recently sold home in Ballantyne Street Thornbury could fetch about $330 per week, or $17,160 per annum, according to the selling agent.
When you divide that annual rent, by a percentage yield which most valuers say averages between 3 and 3.5 per cent for inner city properties at the moment you may find the price is much higher than the price that is quoted.
Using our Ballantyne Street example, a valuer would estimate the property is worth around $528,000, based on dividing $17,160 by 0.0325 (3.25 per cent).
This is far higher than the $420,000 plus the property was advertised for.
Coincidentally, the property sold at auction last week for $551,000 (which reflects a low yield of 3.1 per cent).