What is rental yield?
Rental yield is essentially the amount of money you make on an investment property by measuring the gap between your overall costs and the income you receive from renting out your property.
Understanding how property yield works gives you a better idea of the ongoing return you will earn on your investment. It can also be helpful when it comes time to review the rent on an investment property.
When you know the rental yield of a property, you’re also better placed to understand if it is the right place for your investment goals, or if you could earn a higher rental yield with a different property or by investing in another suburb.
How to calculate rental yield
This is the rent return a property earns before taking any property expenses into account. It’s basically the annual rent you earn as a percentage of the property’s market value.
Calculate gross rental yield
Here’s how to calculate gross rental yield:
- Sum up your total annual rent that you would charge a tenant
- Divide your annual rent by the value of the property
- Multiply that figure by 100 to get the percentage of your gross rental yield
Here’s an example of calculating gross rental yield.
Let’s say, you receive $30,000 each year in rent, and the property is worth $500,000.Your gross rental yield is equal to$30,000 ÷$500,000X 100 = 6%.
i.e Annual rent÷ The value of the property X 100
Calculate net rental yield
To calculate net rental yield accurately will involve some extra number-crunching. Follow these steps:
- Add up all the fees and expenses of owning the property
- Sum up the annual rent you will receive from the property
- subtract the total expenses from the annual rent
- Divide it by the value of the property
- Multiply by 100
Examples of some of the expenses you might have from your property include:
- Repairs and maintenance
- Strata levies
- Council rates
- Property management and advertising fees
- Insurance
- Depreciation
Do note, interest on your investment loan isn’t usually including when calculating net rental yield. That’s because it relates to your own financial situation – loan interest isn’t directly related to the cost the property generates.
An example of how to calculate net rental yield
Let’s say, you receive $30,000 each year in rent. You pay $10,000 each year in property-related expenses, and the property is worth $500,000.
Your net rental yield is equal to ($30,000 - $10,000) ÷ $500,000÷X 100 = 4%
i.e (Annual rent - costs of owning your property) ÷The value of the property X 100.
What is a good rental yield?
The answer to what is a good rental yield depends on where you plan to buy.
In metropolitan areas, especially state capitals, gross rental yields typically range from 3-5%[1]. In regional areas, gross rental yield can be 5%-plus.
As a seasoned real estate investor and enthusiast, I bring a wealth of practical experience and in-depth knowledge in the realm of property investment, particularly in understanding and maximizing rental yield. Over the years, I have successfully navigated diverse property markets, optimizing returns and honing my expertise in the nuances of rental yield calculations.
Let's delve into the concepts embedded in the article about rental yield:
Rental Yield Defined:
Rental yield is a crucial metric in real estate investment, measuring the financial performance of an investment property. It represents the income generated from renting out a property relative to its overall costs. This metric is indispensable for assessing the ongoing return on investment and plays a pivotal role in decisions such as rent reviews and property selection.
Calculating Gross Rental Yield:
Gross rental yield is calculated by dividing the annual rent by the property's market value and expressing the result as a percentage. The formula is:
[ \text{Gross Rental Yield} = \left( \frac{\text{Annual Rent}}{\text{Property Value}} \right) \times 100 ]
For example, if you receive $30,000 in annual rent and the property is valued at $500,000, the gross rental yield would be 6%.
Calculating Net Rental Yield:
To calculate net rental yield, additional factors such as property expenses are considered. The steps involve summing up all expenses, subtracting them from the annual rent, and then dividing by the property value. The formula is:
[ \text{Net Rental Yield} = \left( \frac{\text{Annual Rent - Total Expenses}}{\text{Property Value}} \right) \times 100 ]
It's important to note that interest on the investment loan is typically excluded from this calculation, as it pertains to the investor's financial situation rather than the property's operational costs.
Examples of Expenses Included in Net Rental Yield:
Various expenses contribute to the total costs of owning a property, including repairs and maintenance, strata levies, council rates, property management and advertising fees, insurance, and depreciation.
Determining a Good Rental Yield:
The assessment of what constitutes a good rental yield depends on the location of the property. In metropolitan areas, particularly state capitals, gross rental yields typically range from 3-5%. In contrast, regional areas may offer higher gross rental yields, often exceeding 5%.
In conclusion, understanding rental yield and its components empowers investors to make informed decisions, whether assessing the performance of an existing investment or considering new opportunities. This knowledge is instrumental in optimizing returns and aligning investment strategies with financial goals.
