If you're a property investor, odds are you want to make a return on your investment. This is where understanding what rental yield is and how you can calculate it can come in handy.
Rental yield is the profit margin you make each year from your investment property. It measures the gap between your cost - like repairs, maintenance, and depreciation - and the income you receive over the year from rent.
If your current property has had a poor return in the last few years, it may be time to try selling to find a better-performing location. If you're looking in a new area and find the average rental yield figures are quite high, you may decide it's a good suburb to invest in.
Managing Director of loans.com.au Marie Mortimer emphasises the importance of researching your next property before committing to the purchase.
"If you've decided to sell your current property, or if it's not giving you the returns you'd hoped for, it's crucial to do plenty of research when purchasing your next property to ensure it is a solid investment. You can use things like property reports and recent sale prices in similar areas as a good start," Ms Mortimer said.
Whether you have an investment property already or are looking to buy one, understanding potential income returns is a crucial part of assessing whether your investment is going to be financially successful.
There are two types of rental yield: gross and net. Gross rental yield is most commonly used, while net rental yield is a more accurate assessment of your property’s potential.
All you need to work out your gross rental yield is your annual rental income divided by your property’s value as a percentage, either as the purchase price or market value.
How to calculate gross rental yield:
Add up your rental income for the year to get your total annual rent (weekly rental income x 52)
Divide your annual rent by the value of your property
Multiply that figure by 100 to show your gross yield as a percentage
This can be expressed by this simple formula:
Gross rental yield = annual rental income / property value x 100
Let’s illustrate this with an example. Let's say you made $30,000 in annual rental income and your property is worth $600,000. Using the calculation: $30,000 / $600,000 x 100 = a 5% gross rental yield.
Net rental yield takes into account all the expenses you incurred in the year. While it’s similar to the first formula, you’ll need more information for an accurate result.
How to calculate net rental yield:
Add up your rental income for the year to get your total annual rent
Add all of the expenses you incurred from owning the property (purchase price, stamp duty, legal fees, property management fees, etc.)
Subtract the annual expenses from the annual rent to get your income
Divide the net income by the value of your property
Multiply that figure by 100 to show your net yield as a percentage
This can be expressed by this simple formula:
Net rental yield = (annual rental income - annual expenses) / (total property costs) x 100
Let's illustrate with another example. Let’s say you made $30,000 in rental income and your property is worth $600,000. But this time, you also had to fork out $2,000 for repairs, $3,000 for insurance, and $1,000 in body corporate fees. Meaning, your expenses total $6,000.
Using the calculation: ( $30,000 (income) - $6,000 (expenses) ) / by $600,000 (property value) x by 100 = a 4% net rental yield.
There's no blanket rule on what is considered a ‘good’ rental yield, as expected returns differ depending on where your investment property is located, the type of property, how much it’s worth, and so on. Obviously, you always want to have a positive return on your investment; otherwise you'd be losing money.
Generally speaking, if you buy in a metropolitan area (like a capital city), yields above 3% are considered a ‘good’ return. If your property is in a regional area, a rental yield above 5% is a ‘well-performing’ investment.
When assessing investment property rental yields, it's important to keep in mind both past performance as well as the characteristics of the local property market such as the current rental demand, vacancy rates, and house prices. All of these additional factors can play into how much rental yield you can expect not just now but into the future.
The type of investment property, as in whether it’s a house or apartment, has a serious bearing on your rental yield potential.
Houses typically require more maintenance than an apartment which means your annual costs could be greater. However, they typically have stronger capital growth opportunities and can be easier to renovate, which can increase the value of your home.
On the other hand, apartments are typically a high-yield property type. Apartments often have less upkeep but have expenses like body corporate fees and property management costs. Given you're buying in a block with a large amount of the same rooms, it can be harder to find capital growth opportunities, which means you may need to spend less on expenses to achieve a higher yield.
As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.