What does rental yield mean?
Rental Yield is a measure of how much cash [or rent] your property produces 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 a very important one.
By calculating rental yield, we can compare properties and help provide an overall assessment of the best place to purchase.
Here comes the maths:
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.
Gross rental yield = Annual rental income (weekly rental income x 52) / property value* x 100
(* Either purchase price or current market value, depending on whether you are after your actual or current market rate)
Let’s work with an example:
Property purchase price = $400,000, Weekly rent = $350 (350 x 52) / 400,000 x 100 = 4.55%
- Whilst 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 of property including both purchase and transaction costs [property purchase price, stamp duty, legal fees, pest and building inspections, any start-up 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 cash flow for investors – which will assist to fund the property and ultimately improves your return on investment.
Rental Yield and Property Friends. We are often asked to provide information for a location or for areas we’ve identified as “hot spots”.
Rental yield is one of the statistics we use to evaluate. It’s not the “be all or end all”, it is, however, an important factor to consider. Some of the other factors that we review in conjunction with rental yield is the expected growth rate, nearby infrastructure, employment rates, future growth plans etc.
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Property Friends is a specialist Property Investment Strategist that provides solutions for people aspiring to financial independence, choices in retirement, or leaving a legacy. www.propertyfriends.com.au (03) 9758 5331