Rental yield is a technical term that essentially tells you how much return you are getting from your investment property. It is a handy indicator of a property’s investment potential but there are a few things you need to know if you’re going to use it successfully.
The first is that there are two types – gross and net. And they are calculated differently. Let’s take a look.
Gross rental yield
Gross yield is calculated by dividing the annual rental income you receive by the property value, and then multiplying this figure by 100.
For example, if you collect $20,800 rent annually ($400 per week) and your property value is $450,000, it will look like this:
- $20,800 (annual rent) / $450,000 (property value) = 0.0462
- 0.0462 x 100 = 4.622
- The gross yield is therefore expressed as 4.622%
Presumably, the higher the percentage, the better, as it suggests a more efficient return on your investment – more bang for your buck so to speak.
Knowing a property’s gross rental yield is a quick way to make a rough comparison of how its returns fare with other properties you might be considering, but it does not give a full picture of the investment potential a property offers.
Net rental yield
Net yield, on the other hand, offers a more detailed picture of a property’s return. To calculate net rental yield, you also factor in the costs and expenses you incur in addition to your property’s value.
The list of costs and expenses is extensive and can include stamp duty, legal costs, building inspections and recurring expenses such as maintenance and repair work, council rates, strata fees and loan interest repayments.
If you deduct $5,000 for annual costs and expenses from the annual rental income in the gross rental yield scenario in the example above, the net yield is 3.5%.
Of course, the credibility of net yield is dependent on the accuracy of assumptions you make about the cost of repairs, the property’s market value and the property’s occupancy rate.
Rental return is only one factor to consider
Calculating yield should only be part of your assessment of a property’s investment potential. To do due-diligence and ensure you’re making the right investment, it’s also important to consider the resale value, investigate market reports, demographics, sales and rental history in an area, planning and infrastructure, and the story of the building.