Rental Yield Explained – Investment Property
Before you invest in property, it’s a good idea to get familiar with the term ‘Rental yield’. It is a measure of the profitability of an investment property. It shows how much income you generate from rent compared to the property value.
The rate of rental income returned against the costs of an investment property, is a great indicator of a property’s investment potential. However, you need to keep things in perspective when you factor it into your decision to purchase property.
A good first step in examining the impact of the rental yield on the investment potential of a property is to recognise that there are two types of rental yields – gross and net – and they are calculated differently.
Gross Rental Yield
Gross rental yield is calculated by dividing the annual rental income you receive by the property value, and then multiplying this figure by 100.
For example, if you collect $20,800 rent annually ($400 per week) and your property value is $450,000, it will look like this:
• $20,800 (annual rent) / $450,000 (property value) = 0.0462
• 0.0462 x 100 = 4.622
• The gross rental yield is therefore expressed as 4.622%
Knowing a property’s gross rental yield is a quick way to make a rough comparison of how its rental returns fare with others in an area, but it does not give a full picture of the investment potential a property offers.
Net Rental Yield
Net rental yield, on the other hand, offers a more detailed picture of a property’s rental return. To calculate net rental yield, you also factor in the expenses you incur in addition to your property’s value.
The list of expenses is extensive and can include recurring expenses such as maintenance and repair work, strata/body corporate fees, property management fees, council rates, Insurance, water costs etc. For example your annual cost for expenses is $5000, the net rental yield will be calculated as below;
• $20,800 (annual rent) – $5000 (annual expense)
• $15,800/ $450,000 (property value) = 0.03511
• 0.03511 x 100 = 3.51%
• The net rental yield is therefore expressed as 3.51%
Of course, the credibility of net rental yield is dependent on the accuracy of assumptions you make about the cost of repairs, the property’s market value, and the property’s occupancy rate.
What is a good rental yield amount?
A low rental yield 2-4% can suggest that the property may be overvalued which you can see mostly in metropolitan areas, on the other hand high rental yield of 7-9% could imply that the property is below market value which is more common in regional areas. When investment property has higher rental yield that means typically the property is generating steadier cash flow. The rental yield is also impacted with location where properties have low supply and higher demand.
Tips to increase your rental yield
As you can see a higher rental yield can generate positive cashflow and can cover expenses in some scenarios. Key to maintaining good rental yield is to ensure rental price aligns with market price and minimise expenses where possible. While increasing rental yield is important, it is essential to balance with tenant satisfaction and property maintenance. A well-maintained property with happy tenants is more likely to retain value and generate long-term income.
If you are planning to purchase an investment property and want to know more about rental yield please contact us.
** Please note that this information is general advice only and has not been prepared considering your specific financial situation, objectives, or needs. Before acting on any information, consider seeking professional financial advice to determine if it’s appropriate for you.**
