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29 Nov 2023
If you are thinking of buying an investment property, you need to know how to get a good return on your investment. This is where understanding and calculating rental yield will come in handy.
Rental yield is the profit margin you make each year from your investment property. It measures the gap between your cost (such as 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 are looking in a new area and find the average rental yield figures are quite high, you may decide it is 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 and calculating potential rental yield are crucial parts 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. Calculating rental yield is easy once you know the basics. You can do it yourself and create your own rental yield calculator with the methods below.
To work out your gross rental yield, you take your annual rental income and divide it by your property’s value as a percentage, either as the purchase price or market value.
How to calculate gross rental yield:
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 is similar to the first formula, you will need more information for an accurate result.
How to calculate net rental yield:
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. 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.
Use the formulas above when calculating rental yield to see if a property investment is a worthwhile opportunity. Look at your rental yield periodically to ensure you’re making the most out of your rental property.
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 calculating rental yield and assessing current performance, always take into account the characteristics of the local property market. Look at current rental demand, vacancy rates, house prices, as well as past performance to get a better understanding of your returns. All of these additional factors can play into how much rental yield you can expect not just now but into the future.
Using a rental yield calculator is useful at times, but it won’t take into account the factors above that may affect your rental yield percentage.
The type of investment property, be it a house or apartment, can have 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.