Rental yield is a measure of how much cash (or rental income) your property generates each year, as a percentage of the property value.
The property investor dream is to secure a high rental yield property, in a location that delivers large capital gains, combined with low management and maintenance costs.
This means, rental yields are not the only consideration when purchasing an investment property, but still a very important one.
Rental yield is calculated as a gross percentage and generally calculated before expenses are deducted. Gross rental yield is commonly used.
It is simple to calculate and allows you to easily compare properties with different values and rental returns to assist when considering different investment options.
Gross rental yield = Annual rental income (weekly rental income x 52) / property value* x 100
The property purchase price = $400,000 and weekly rent = $350
(350 x 52) / 400,000 x 100 = 4.55%
While the gross rental yield is a simple calculation, it’s important to note that it doesn’t take expenses into account. A property may have a high rental yield, but may also have high expenses, making the rental return low when these are taken into consideration.
If you do want a more precise calculation, you will need to know (or estimate) the total expenses for the property, including both purchase and transaction costs (property purchase price, stamp duty, legal fees, pest and building inspections, any startup loan fees, etc.) and annual costs such as vacancy costs (lost rent and advertising), repairs and maintenance, managing real estate agent fees, home and contents insurance, strata levies (if applicable), rates and charges etc.
Net rental yield = (Annual rental income – Annual expenses) / (Total property costs) x 100
A high yield means good cashflow for investors, which helps to improve your return on investment.
* Either purchase price or current market value