How to Calculate Rental Yield on Your Investment Property

Published 05 July 2021 by Team :Different

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Rental yield is a great starting point for understanding if your property is performing well. If you're unsure if you're getting good results in terms of cash flow, it works as a pulse check for your rental property.

You already know it's a great metric before you buy an investment property, and it's equally great while you own it and watch it grow.

We’ve created this short guide to show you how to calculate the rental yield on an investment property and work out what it means for your investing journey.

What is rental yield?

Your property's net rental yield is the annual rent your property brings. You calculate it as a percentage of the property's value.

A property’s gross rental yield is the property’s annual earning potential without factoring in property costs - which usually come in the form of rates, fees and maintenance costs.

Once you factor these costs into gross rental yield, you’ll end up with the profits you’ll make from your investment property or net rental yield. Therefore, a property’s net rental yield will always be less than its gross rental yield.

Investors are particularly interested in gross rental yield. It serves as an indication of the health of a property and how much return they can expect. Generally speaking, higher yields translate to higher cash flow for you over the course of the investment.

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How do you calculate rental yield?

The question of how to calculate the rental yield on a property is pretty simple. We'll show you.

You can either do it yourself, or you can use a rental yield calculator.

We’ll start with gross rental yield. The equation for calculating gross rental yield is:

Gross rental yield = Annual rental income / value of property x 100.

We'll show you a hypothetical example.

Let’s say our friend, Omar, wants to calculate the gross rental yield on his rental property. The property is valued at $1.1M. Omar charges $650 in rent per week at the moment, and after getting a rental appraisal online he knows that it's about the right rent.

First, Omar needs to calculate the annual rental return or the rent accumulated in 52 weeks.

Annual rental income = $650 x 52 = $33800.

Now, he can plug that into the gross rental yield equation:

Gross rental yield = $33,800 / 1,100,000 x 100 = 3.07%

Now, Omar wants to learn how much profit he can expect from this property by calculating the net rental yield.

Omar estimates his annual investment property expenses to be around $10,000. He factors in costs like:

  • Maintenance costs
  • Council rates
  • Strata fees
  • Property management fees 
  • Legal fees
  • Loan fees
  • Insurance

Net rental yield = (Annual rental income - annual expenses) / value of property x 100.

For Omar’s rental property, the net rental yield is:

Net rental yield = ($33,800-$10,000) ÷ $1,100,000 x 100 = 2.16%.

So, Omar is looking at a 2.16% net rental yield. It's on the lower end of what one would consider a healthy margin, but considering the average in his suburb is 1.95%, Omar is quite happy with it.

In case you don't want to do these calculations by hand you can use a rental yield calculator instead.

What is a good rental yield in Australia?

You might have calculated your investment property’s rental yield and are wondering: what is a good rental yield in Australia?

Generally, if you're looking at an investment property in an Australian city, a healthy gross rental yield is between 3%-5%.

And while higher yields are considered a good thing, if your gross yield is too high (higher than 5.5%), that could be a red flag that your property might be undervalued. Similarly, if your gross yield is lower than 3%, your home might be overvalued or your property is simply not performing well in giving you a strong cash flow.

In regional Australia, a healthy yield will often be greater than 5% though.

Why is there a difference between yields in cities and regional areas - you ask?

Property prices in regional Australia are generally lower than properties in city areas.  And while rent in the city or other high demand areas is higher, so is the value of the property.

That is partly why you’d expect a regional property to have a higher rental yield.

To put it plainly, regional properties are cheaper than city properties so regional property yields are higher.

To put it plainly, regional properties are cheaper than city properties so regional property yields are higher.

Net rental yield = (Annual rental income - annual expenses) ÷ value of property x 100

By looking at the formula, we can always assume the following:

  1. Yield and property value are inversely proportional - when your property value increases, your yield drops and vice versa
  2. Higher rental income leads to higher rental yields
  3. Less expenses on a property means higher rental yields

Following these three points, the main reason that gross yields for regional properties can be significantly higher is because property values in regional areas are significantly lower than property values in urban areas. 

To put it plainly, regional properties are cheaper than city properties so regional property yields are higher.

If you’re interested in buying an investment property in regional Australia, have a read of our guide on the regional market boom

Rental yield is a great metric to have when deciding to purchase a property - but it’s also a starting point. Consider the location of your property and the overall economic prospects of the area before you purchase a property.

Enlist the help of an expert to weigh out your options. More importantly, base your decisions on your personal business goals, risk aversion and long term investment vision.

If you own a property and are keen to increase your rental yield, increasing rent and lowering expenses are the avenues to get there. 

Have a read of our article on increasing rental returns to help you get started on boosting your property yield. 

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Disclaimer: The views, information, or opinions expressed in this blog post are for general information purposes only and should not be relied upon. We have not taken into account specific situations, facts or circumstances, and no part of this blog post constitutes personal financial, legal, or tax advice to you.