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Whether you’re buying your first investment property or have an established portfolio under your belt, you want to make sure you're getting the best returns from your investments.
The reality is that not all rental properties offer the same rental yield, which means some properties might not generate the returns you’re hoping for as an investor. By understanding how to calculate rental yield as well as what benchmarks you should be aiming for, you’ll be able to make informed decisions about where to invest and when to raise the rent.
Plus, there are practical ways you can lower your expenses and increase your rental property’s earning potential to boost your rental returns.
We’ll walk you through some of the best rental property advice and effective strategies you can use to increase your rental yield and maximise the profits you generate from your rental property.
Why it’s important to understand rental yield
As you’d know, not every dollar you earn from rent goes straight to your back pocket. You’ve got expenses and costs to factor in, such as property management fees, repairs, property maintenance, council, and strata fees.
When we talk about maximising your investment property returns, we’re really talking about how to increase rental yield, and in turn, your profits.
So, what is rental yield and how do you work out what this figure is for your property? By calculating your rental income minus any costs and expenses you incur, you can figure out how much you actually make from your investment property.
How do you calculate rental yield?
There are two steps to this process and you can do both without a rental yield calculator.
First, to calculate your gross rental yield (the earning potential of your investment property), simply:
- Figure out how much rental income you earn over a year
- Divide your annual rental income by the value of your investment property
- Multiply this by 100 to get the percentage that represents your gross rental yield
Now, to figure your net rental yield (the profits you can expect to generate from your investment property), you’ll need to:
- Figure out how much you spend on expenses for your investment property each year
- Calculate the annual rental income your generate from your investment property
- Subtract the total expense from your annual rental income
- Divide this figure by the value of your property and multiple by 100
Not into the DIY approach? There are a bunch of free online rental yield calculators (such as this one) which can give you a quick snapshot of your property’s rental yield.
Now, you might be wondering what is a good rental yield.
So, what is a good rental yield?
Generally speaking, a good rental yield in an inner-city location (such as capital cities) would be a gross rental yield between 3-5%.
In regional areas, you’d want to see a gross rental yield of over 5%.
When it comes to how to increase your rental property income, two things need to happen: you need to lower the amount you spend on expenses and increase how much you can charge for rent.
How to maximise your investment property’s rental yield
The first half of the puzzle to maximising your returns is to improve your rental yield.
Here are 5 clever ways to increase the rental yield of your investment property:
- Set the right rental rate according to current market conditions
- Follow smart rental marketing strategies
- Invest in quick improvements that will add value
- Upgrade the quality of your property with proactive maintenance
- Consider accepting pets
Let's go through each in-depth.
1. Set the right rental rate for current market conditions
Your intuition might tell you that you should aim to get as high a rent as possible. Not technically wrong, but this is a counterintuitive way of thinking.
Instead, you should focus on setting the right rent according to how the property market in your area is doing.
This is because you need to strike a balance between getting strong returns from your rentals and finding good tenants promptly.
- If it's too high you won't get any interested tenants
- If it's too low, you're losing out on important gains.
Setting the rent for your investment property is all about understanding current market conditions. Supply and demand are what determine how much you can charge to successfully secure a tenant.
As a general rule, if there aren't many properties available to rent in your area, you can look to set a higher rental rate. However, if there are lots of empty properties on the market, you might need to set a lower rental rate to secure a tenant.
This is why vacancy rates are such an important metric to keep an eye on.
Discounting your rent by $20 to $50 per week will cost you less than having an empty property earning no rental income for weeks or months.
It’s not always a smart idea to raise the rent. If vacancy rates are high in your local area, it may be counterproductive to raise your rent and risk losing your current tenants.
Plus, it’s important to be sensitive to current market conditions and avoid raising the rent during tough economic times (as we’ve seen during the COVID-19 pandemic). In times like this, it’s often a wiser move to slightly reduce your rent to avoid long periods of vacancy and maintain a consistent stream of rental income.
2. Ensure you’re following smart real estate marketing strategies
The way you market and advertise your property is what will enable you to get the best return on your real estate investment.
It’s all about considering real estate marketing strategies that’ll make the best first impression on potential tenants to ensure you can secure a tenant quickly and generate consistent rental income.
Make sure that you're:
- Investing in renovations tenants truly want
- Getting professional photography of your rental
- Upgrading and repairing the property with preventative maintenance.
Read our article on making your investment property stand out in a competitive market to learn more about this in-depth.
Finding a good property manager is also a great way to get ideas for making your rental more competitive.
3. Make small, cost-effective improvements that will add value to your rental
Tenants love hearing that you've made some recent renovations to your rental. And you don't need to spend an arm and a leg to get a good response.
- Focus on the bathroom and kitchen
- Get a fresh coat of paint
- Update the outdoor space
- Pet-proof the rental
- Consider upgrading the heating and cooling systems
- Replace worn-out flooring
Read more about cost-effective renovation ideas.
4. Upgrade the quality of your property with proactive maintenance
Fixing issues quickly will keep your current tenants happy and will prevent big, costly problems from happening at your property, too.
At your regular inspections, your property manager should be on the lookout for potential problems that could easily be repaired or replaced.
For example, by noticing the exhaust fan isn’t working properly in the bathroom, your property manager can proactively get this fixed to prevent mould from growing in your rental (which can cost hundreds of dollars to fix down the line).
Plus, proactive property maintenance can improve the street appeal of your property to ensure you’re getting the best return on your investment.
- Repaint fences
- Tidy up the gardens
- Repair stiff door locks
- Fix fly screens that need re-meshing
- Update your light fittings
5. Consider accepting pets
Did you know 60% of NSW households own a pet?
In a competitive market, accepting pets into your rental property can help increase the appeal of your investment property.
Here are a few things to keep in mind before accepting pets in your property:
- Make sure to ask tenants what type of pet they have and how well they’re trained.
- Consider what types of pets would be suited to your rental, and look for applicants who are the best match.
- Think about charging a small fee to cover the costs of professional cleaning at the end of their lease.
- Be on the lookout for pet damage at every inspection so you’re able to recoup any losses from damage incurred by your tenants.
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Learn more about how :Different can help you navigate through the complexity with our obligation-free rental appraisal report.
How to reduce the cost from your investment property
Cutting costs from your rental is an underappreciated way of boosting your profits in real estate.
By reducing your outgoings on things like repairs, maintenance, and your mortgage, you’ll ensure you’re getting the returns you expect from your rental property.
So, here’s 3 actions you can take to reduce costs in your investment property:
- Facilitate regular inspections to catch problems early
- Secure the best rates on maintenance and repair quotes
- Check if you can get a better mortgage rate
1. Facilitate regular inspections to catch potential problems early
These check-ins are a valuable opportunity to spot any potential issues before they become big (and expensive) problems.
A good property manager will arrange this on your behalf and will be trained to look for important signs of potential problems. They’ll be able to spot things like water leaks and mould outbreaks that can easily cost hundreds (if not thousands) of dollars if left untreated.
If you'll be conducting inspections yourself, make sure you're well across tenants' and landlords' rights and responsibilities in your state.
2. Secure the best rate on maintenance and other trade costs
Unless you're a handyman or tradie, knowing if you are paying a fair price to fix that leaky tap or broken cupboard door can turn into one big guessing game.
Not all tradespeople charge the same rates for the same services. Plus, their level of expertise and quality of service may vary greatly too, which is why it’s important to shop around to get the best quote and to be well across what you can expect to pay for property maintenance.
We’ve assembled a property maintenance price list in another article. Keep it on-hand so you know you’re not getting ripped off.
Property managers can also help you secure fair quotes. They should have a general idea of what specific repairs cost, and a network of tradespeople they trust. To learn more, read our article on how property managers find you the best maintenance prices.
3. Check if you’re getting the best mortgage rate
Speaking of getting the best deal, you should be shopping around with your mortgage, too.
Right now, the official cash rate has been slashed to the lowest rates on record.
Plus, many banks and lenders are passing on these savings to borrowers, which means you can access more competitive mortgage rates than previously possible.
As an investor, you won’t be rewarded for staying loyal to a lender. Instead, you should be looking at the current rates, comparing your options and considering whether it’s worth refinancing your home loan to access a better deal.
This could save you thousands of dollars over the life of your loan.
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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. You should seek tax advice from your accountant, specific to your situation.