Rental Yields

Understanding Rental Yields

When purchasers consider buying an investment property, one of the most common factors being looked at is what return the property will give them – this is called the yield.

Yield is a measurement of the future income on an investment and is generally calculated as a percentage based on the investment’s cost or market value.

There are two calculations of yield – Gross and Net Rental Yield.

Gross Yield

Gross yield this gives you the percentage of income on an investment prior to expenses being deducted. To work out gross yield, you need the annual rental income (weekly rental income x 52) and the property value (can be purchase value or market value), and the calculation is:

Gross rental yield =  Annual rental income / property value* x 100

An example:

Property purchase price = $400,000
Weekly rent = $350
(350 x 52) / 400,000 x 100 = 4.55% Gross Rental Yield

Rental yields are not an accurate predictor of future performance particularly when the property market prices are rising but rentals are stalling.  Further, a property with a high gross rental yield may also have high expenses which would result in a potentially low net rental income when the expenses are taking into account.

Net Yield

Net yield provides you with the net calculation of income on an investment after expenses have been deducted. This gives a more accurate calculation taking into account both purchasing 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. The calculation is:

Net rental yield = (Annual rental income – Annual expenses) / (Total property costs) x 100

An example:

Property purchase price = $400,000
Total property costs of purchase = $440,000
Total annual expenses = $5,500
Weekly rent = $350
(350 x 52) – 5,500 / 440,000 x 100 = 2.89% Net Rental Yield

As can be seen in this example, the net rental yield can be significantly lower than the gross rental yield simply due to the impact of investment costs eroding the property return.

There are ways to increase the yield of your property – for example by increasing rents or by reducing expenses; and both will work to increase your cash flow and potentially increase the value of your investment.