Rental yield: What you need to know
If you’re considering buying an investment property, it’s probably a good idea to understand what return the property will give you – in other words, its rental yield!
Before narrowing down on the right property, working out the numbers first is going to be highly important and advantageous.
While some may invest for lifestyle, retirement, infrastructure and other reasons, most would be concerned with its current returns and potential yield.
Rental yield is the profit margin you make from your investment property each year. It simply measures the gap between your costs (repairs, maintenance, and depreciation) and the income you receive from your renters over the year.
What is rental yield?
Rental yield refers to the measurement of a future income on an investment. This is generally calculated annually as a percentage based on the property’s cost or market value, and has nothing to do with capital gain.
Then you have gross rental yield, which refers to the income on the investment prior to expenses being deducted. When it comes to property, expenses can be quite substantial, like renovations and standard safety checks, and can therefore make quite a big difference between gross and net yield.
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.
Net yield is the income on an investment after the expenses have been deducted. These costs are likely to include purchasing and transaction costs, such as legal fees, stamp duty, inspections, loan start-up fees and advertising.
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 Owners Corporation fees, so your expenses total $6,000.So $30,000 (income) minus $6,000 (expenses) divided by $600,000 (property value) multiplied by 100 equals a 4% rental yield.
And finally, there is return yield which is the gain or loss made on an investment. This includes capital gains and can be expressed in dollars or as a percentage. It is derived from the ratio of profit to investment. The return is focused on the property’s past performance, rather than its future earning potential.
How do you calculate rental yield?
Firstly, you will need to follow a few steps to get a property’s yield as an annual percentage.
Step 1: Deduct the property’s ongoing costs and costs of vacancy (i.e lost rent) from the property’s annual rental income.
Step 2: Divide the result of the first step by the property’s value.
Step 3: And then, finally, you multiply the result of the second step by 100.
To calculate the gross yield: Annual rental income (weekly rental x 52) / property value x 100
To calculate the net yield: Annual rental income (weekly rental x 52) – annual expenses and costs/ property value x 100
What should your investment yield be?
Your investment rental yield should reflect a combination of your goals and current financial circumstances.
There is no science behind choosing an investment property and there isn’t an ideal property yield to strive for, either.
A high rental yield will be good for your cash flow, but it doesn’t necessarily indicate the property will offer you a strong capital return in the long run – that’s determined by a whole host of factors.
Ultimately, you’ll need to think about your financial goals and your current financial position when trying to choose the best property to invest in.
Barry Plant Investor Information
Disclaimer: The contents of this article are believed to be accurate at the time of posting. Any advice here is of a general nature only and has not been tailored to your personal circumstances. Please seek professional advice prior to acting on this information.