What is Rental Yield?

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What is Rental Yield?

Whether you're a first time investor, or an experienced investor before you buy an investment property you will likely calculate its expected yield. 

 

So you may be asking, if you are a first time investor - What is Rental Yield?

 

The yield on an investment property details the future income you can expect to make represented as a percentage on an annual basis. Not only does it help you determine if a property is suitable for your wealth-building goals, but it gives you a benchmark to compare against other investment properties.

 

"Rental yield looks at future income, whereas the return looks at past performance."

 

 

It is important to understand the different terminology used for the investment terms associated with property. For example, you may hear a real estate agent speak about a property’s return on investment. While knowing the return on a property provides you with a picture of the past performance, it doesn't help you understand the future earning potential the property may provide.

 

The four main terms used to outline the earning potential of a property are:

 

Real Estate Yield: Measures the future income on an investment property as an annual percentage. It’s based on the cost or market value of the asset.

 

Gross Rental Yield: The gross income on an investment before expenses are subtracted. Expenses on a rental property can sometimes be significant, therefore there can be a large variance between the property’s gross and net rental yield.

 

Net Rental Yield: The income on an investment property after expenses have been subtracted. Typical examples include purchasing and transaction costs, and repair and maintenance costs.

 

Return: The total gain or loss on an investment over the holding period. This includes capital gains, and it’s usually expressed in dollars or as a percentage based on the amount of profit made on an investment.

 

Now that you understand the terminology of an investment, you may be asking yourself so how do I calculate the rental yield on my investment? 

 

The calculate the gross rental yield on a property follow the simple steps below

 

1. Subtract the ongoing expenses and vacancy costs from your property’s annual rental income (weekly rent x52).

2. Divide your annual rental income by the value of the property.

3. Multiply that figure by 100 to get the percentage of your gross rental yield.

 

For example - the annual rent ÷ the value of the property x 100.

 

$600 per week x 52 weeks in a year = $31,200

Divide that by the property’s market value $650,000 

Times by 100

= 4.8%

 

And to calculate the net rental yield

 

Similar to the process above however this time you factor in your property expenses that you pay out on the property each year. 

 

Examples of some of the expenses you may have for your property:

  • Repairs & Maintenance
  • Strata Levies
  • Council Rates
  • Property management & Advertising Fees
  • Insurances
  • Depreciation

Interest on your investment loan isn’t usually included when calculating the net rental yield. That’s because it relates to your own financial situation - loan interest isn’t directly related to the cost the property generates.

 

For example - the annual rent minus the property expenses ÷ the value of the property x 100.

 

$600 per week x 52 weeks in a year = $31,200

Minus the annual property expenses ($8,000) = $23,200

Divide that by the property’s market value $650,000 

Times by 100

= 3.5%

 

So what should my rental yield be?

 

Your net rental yield should be suitable for your financial situation and your wealth-building goals. If you’re more focused on cash flow, you may choose a higher-yielding property with fewer prospects for rapid capital growth. In contrast, you may buy a property with significant capital growth potential but a lower rental yield. It depends on your goals and your risk appetite as each scenario will have its own set of considerations to review and analyse. Generally speaking in metropolitan areas, especially state capitals, gross rental yields typically range from 3-5%, in regional areas gross rental yield can be 5% plus.

 

Even if you’re not currently looking for a rental property, it’s a worthwhile exercise to calculate the gross and net rental yield on your current properties to determine what changes you may be able to make to increase your yield. As always, make sure you speak with a qualified finance and legal professional for tailored advice before you make any big changes to your finance and investments.

 

 

A solid investment should be profitable, low maintenance and stress free and making the right choice of property manager can make a world of difference. At Lot 42, we understand that your investment property - or your home - is a valuable asset requiring expert care and attention, and entrusting us ensures you will receive the necessary experience and knowledge to provide you and your property with the comprehensive level of service required.