Rental yield explained: what you need to know
So how do you know if you’re getting a good investment?
Rental yield helps you determine a property's value and potential.
It measures the profit you've generated from your investment each year as a percentage value. And it’s also a useful comparison if you’re deciding between comparable properties.
There are two types of rental yield: gross and net.
Gross rental yield is calculated using annual rental income and property value.
Net rental yield is calculated using rental income after deducting all expenses involved and property value
How do you calculate rental yield?
Gross rental yield
Divide your annual rental income by the property value and multiply that figure by 100. The property value can be the amount you bought it for or its current market value.
For example:
You purchased a property for $950,000. The weekly rent on your property is $500. Multiply this figure by 52.
500 x 52 = 26,000
Gross rental yield = (annual rental income/property value) x100
Gross rental yield= (26,000 / 950,000) x 100
Gross rental yield= 2.74%
Net rental yield
Factor in your expenses. Thes expenses can provide you with a clearer understanding of the income return on your investment.
Your investment property expenses may include:
Insurance
Strata fees
Vacancy costs
Repair costs
Legal fees
Building inspection fees
Maintenance fees
Agent fees
Mortgage repayments
Stamp duty
Your annual payments are calculated by adding the relevant annual expenses for your investment property. Following the previous example, say you calculate annual expenses of $4000.
Net rental yield = [(Annual rental income - annual expenses) / total property cost] x 100
Net rental yield = [(26,000 - 4000) / 950,000] x 100
Net rental yield = 2.32%
To better understand the implications of a rise or fall in prices on your rental yield, keep an eye on the property market. You'll also learn the factors that affect the return on your property. These include property prices, infrastructure, location or vacancy rates.
So, what is a ‘good’ rental yield?
There is no definitive 'good’ rental yield. The higher the rental yield, the higher the return on your investment, but there could be a catch.
Properties with high rental yield could imply undervaluation or that the property is below market value, compared to other similar properties in the market
Something to look into during your due diligence process.
Depending on your financial goals, high rental yields could be seen as a better investment given the high expected cash flow. But what does this mean for capital growth? How important is the latter given your investment horizon?
Evaluating and comparing property values and their respective rental yields can be useful when you’re investing in property.
As with all investments, the financing component will impact your return. Sandcastle Finance is here to answer any investment financing questions you may have. Book a free 30-min consultation call.