Thrive Property NT

What is rental yield and how to calculate it

rental-yield

As a property investor, it’s super important that you understand what rental yield is and how it works. Knowing how to calculate rental yield can help you to assess the value and potential of a property. In this article, we explain how to calculate rental yield, so that you can ensure a good return on your investment.

What is Rental Yield?

In a nutshell, rental yield is the amount of money that you make on an investment property. It measures the profit that you generate each year from your investment/s as a percentage of its value. Essentially, a high rental yield equates to a greater cash flow.

Understanding how rental yield works will enable you to better understand the ongoing return you will make. It can also be helpful for reviewing the rent on a property too.

When you know the rental yield of a property, you’re able to better understand if the property is right for your investment goals, or if you could earn a higher return with a different property, or by investing in a different suburb.

Types of Rental Yield

When it comes to rental yield, there are two different types of yield that you need to understand; gross and net.

Gross yield is calculated through annual rental income and property value. This is the most used calculation for quickly finding out how a market is performing. However, it may be inaccurate as it doesn’t consider personal expenses.

Net yield is calculated by including all expenses involved. This allows a much clearer figure that includes other factors and considers all expenses that you will incur from maintaining and managing a property.

How to Calculate Rental Yield

Calculating Gross Yield

You can calculate the gross yield of a property by dividing the annual rental income by the property value, then multiply that figure by 100.

 Annual rent ÷ The value of the property X 100

Calculating Net Yield

Slightly more complex than gross yield, to calculate the net yield of a property, you need to factor in your expenses in order to provide a clearer understanding of the income return on investment.

Expenses for your investment property may include:

  • Repairs and maintenance
  • Strata levies
  • Council rates
  • Property management and advertising fees
  • Insurance
  • Depreciation

(Annual rent – expenses associated with property) ÷ The value of the property X 100.

What is a good Rental Yield?

There really is no answer to what defines a ‘good yield’. Essentially, it depends on where you plan to buy and each property’s features. While it’s easy to assume that a higher rental yield equates to a higher return, this may not always be the case.

Typically, properties with a high rental yield (between 8 – 10%) tend to be undervalued or below market value. While properties with a lower yield (between 2 – 4%) can mean that it is overvalued.

From the perspective of an investor, higher rental yields are considered better as they tend to generate a steady cash flow. Therefore, we advise that investors look for properties with a yield of 5.5% or above, as this means stable rental income.

What Factors Affect Rental Yield?

There are many factors that may affect the rental yield of a property. Here are some factors most commonly seen:

  • Location: Popular areas, such as outer and inner city suburbs may attract higher rents due to demand.
  • Economy: An area’s economy can affect property prices to varying degrees. For example, new infrastructure that links an area to nearby cities can affect property prices, which in turn, strengthens the local economy.
  • Population: Area population and the market go hand in hand; where there’s more people, more housing is needed to accommodate.
  • Vacancy rates: An oversupply of rentals can affect an area’s vacancy rate. On average, a normal vacancy rate can range from 5 – 8%.

Conclusion

Understanding and checking the rental yield in the area you are considering investing in can help you to determine the potential profit and losses; it is one of the most important steps for you to undertake when researching investment opportunities. Evaluating and comparing property values and their associated yields can be useful for investing your money wisely.

At the end of the day, we always encourage investors to focus on the bigger picture; don’t get carried away by chasing high rental yields. Rather, consider the total return as opposed to the risks a property may entail. After all, you want your investment property to make some money!

 

If you’re a property investor, you need to know the day-to- day details are in capable hands. Our number one goal is to take the worry out of property management and free up more of your time, so you can do more of what you love. To get in touch for an initial chat and to find out more information about our prospectus for investors, call (08) 8911 0741 or contact us online.

«
»