What is rental yield and how to calculate it

What is rental yield and how to calculate it
If you’re a property investor, you’re going to want to make a profit on your investment. That’s where rental yield can be helpful. Find out what it is, how to calculate it, and what a good rental yield is here.
Find out if you qualify
1.99%
discount-variable rate p.a.
2.71%
comparison rate p.a.
DO I QUALIFY LEARN MORE

If you’re a property investor, you’re going to want to make a return on your investment property. That’s where rental yield can be helpful. Find out what it is, how to calculate it, and what a good rental yield is here.

What is rental yield?

Rental yield is the profit margin you make each year from your investment property. It measures the gap between your costs, like repairs, maintenance, and depreciation, and the rental income you receive over the year from your tenants.

Rental yield allows you to review how your current investment property is performing and whether buying an investment property in a certain suburb is going to be a good investment.

If your current property has had a poor rental yield in the last few years, it may be time to try and sell and find a better-performing area. If you’re looking in a new area and find the average rental yield is quite high, you may decide it's a good suburb to invest in.

Whether you have an investment property already or are looking to buy one, rental yield is a powerful tool in assessing whether you’re investment is going to be financially successful.

How to calculate rental yield

There are two types of rental yield: gross and net. You can find out how to calculate each below:

Calculating gross rental yield

Gross rental yield is measures your annual rental income with the property value as a percentage.

Follow the steps below to calculate gross rental yield:

  1. Add up your rental income for the year to get your total annual rent.

  2. Divide your annual rent by the value of your property.

  3. Multiply that figure by 100 to show your gross rental yield as a percentage.

Here’s the calculation in action. Let’s say you made $30,000 in rental income and your property is worth $600,000. Using the calculation that's $30,000 divided by $600,000 multiplied by 100 equals a 5% gross rental yield.

Calculating net rental yield

Net rental yield is the same as gross rental yield but takes into account all the expenses you incurred in the year. It’s considered a more accurate representation of your investment return.

Follow the steps below to calculate net rental yield:

  1. Add all of the expenses you incurred from owning the property.

  2. Add up your rental income for the year to get your total annual rent.

  3. Subtract the annual expenses from the annual rent.

  4. Divide your annual rent by the value of your property.

  5. Multiply that figure by 100 to show your net rental yield as a percentage.

Rental expenses you may have incurred include depreciation, insurance, repairs and maintenance, body corporate fees, property manager fees, and council rates.

Let’s say you made $30,000 in rental income and your property is worth $600,000. But you also had to fork out $2,000 for repairs, $3,000 for insurance, and $1,000 in body corporate fees, so your expenses total $6,000.

So $30,000 (rental income) minus $6,000 (expenses) divided by $600,000 (property value) multiplied by 100 equals a 4% rental yield.

What is a good rental yield?

There’s no blanket rule on what is a good rental yield as expected returns differ on where your investment property is located. Obviously, you always want to have a positive rental yield otherwise you’d be losing money.

Typically, if you buy in a metropolitan area like a capital city, a rental yield above 3% is considered a good return. If your property is in a regional area, a rental yield above 5% is a well performing investment.

How does the property type affect rental yield

Property type has a serious bearing on your rental yield. For example, houses typically require greater maintenance than an apartment which means your expenses will be greater. However, they typically have stronger capital growth opportunities and can be easier to renovate, which can increase the value of your home.

Apartments often have less upkeep but have expenses like body corporate fees. 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 rental yield.

Find out if you qualify

Tags: buying an investment property | investment property

Your goal is within reach
with our loan products

Related articles

Use an investment home loan calculator to estimate how much interest you’ll be paying, you...

Find out how to refinance your home loan to buy an investment property with loans.com.au

Buying an investment property is a big decision. Here’s some costly mistakes smart investo...