What Is Rental Yield?
Rental yield is a measure of the return on your investment property from rental income. It is the total annual rental income you receive, expressed as a percentage of the property’s value. Understanding how property yield works can help you make informed decisions to ensure a good return on your investment. By knowing how to calculate rental yield, you can:
- Assess a property’s potential value as an income-earning asset, compared with others in your area
- Figure out if you’re earning a high enough rental yield or if you should reconsider your investment strategy for a particular property
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Learn the ins & outs of investing in properties from an experienced property investor and founder of Home Loan Experts, Otto Dargan.
How To Calculate Rental Yield On A Property
Understanding how to calculate rental yield can help shape your investment goals. You can measure gross rental yield or net rental yield.
How do I Calculate Gross Rental Yield?
Most people measure their returns using gross rental yield, which is the total annual rental income received from a property, expressed as a percentage of its purchase cost.
Your property’s gross rental yield is calculated this way:,/p>
- Your total annual rent from the property
- Divided by what you paid for the property
- Multiplied by 100
Gross rental yield = (Total annual rent ÷ Total Property Purchase Price) x 100For example, suppose you bought a property for $650,000, which earns a rent of $590 a week ($30,680 a year). Using the above formula, the calculation would look like this:
($30,680 ÷ $650,000) x 100 = 4.72%, which is the gross yield of the property.
How Do I Calculate Net Rental Yield?
Net rental yield is the total annual rental income received, minus any property expenses, expressed as a percentage of the property’s purchase price including initial costs. It provides a more accurate picture of return on a property investment, as it takes expenses into account.,/p>
Calculate your property’s net rental yield this way:
- Your total annual rent from the property
- Minus the fees and expenses of owning the property
- Divided by the price of the property, including initial costs
- Multiplied by 100
(Total annual rent – Total annual property expenses) ÷ (Total Property Purchase Price, including initial costs X 100)Let’s say you bought a property for $500,000 plus $40,000 in stamp duty and other associated costs, your rental income for the year was $26,000 ($500 a week), and your total annual expenses came to $10000. Using the above formula, the calculation would look like this:
($26,000 – $10000)/($500,000 + $40,000) x 100 = 2.96% net rental yield.
Net rental yield can be harder to calculate, as you need accurate information about the property’s expenses. Examples of annual property expenses include:
Examples of annual property expenses include:
- Property management fees
- Strata levies (if any)
- Vacancy costs
- Insurance premiums
- Council fees
- Electricity and water rates
Note that taxes and costs associated with loan interest aren’t usually included in expenses for this calculation.
What Is A Good Rental Yield?
The idea of a rental yield strategy is to receive a steady cashflow; the higher the rental yield, the better the cashflow. But what is considered a good rental yield?
It depends on what similar properties in the same location and condition are getting. For example, the rental yield for units is usually higher than that for houses.
Usually, in regional areas where there is high demand, property yield is better. If it is an area where people buy to be owner-occupiers and don’t lease out much, then there likely won’t be great yields. To give an extreme example that illustrates the point, a $5 million house on the water would have a very low rental yield, while a $250,000 house in Orange might have a yield near 5%.
How Much Rental Income Will Lenders Accept When Assessing My Borrowing Power?
Generally, lenders will consider 80% of your gross rental returns along with other income, such as your salary, to calculate your borrowing power. However, every lender has its own way of assessing the rent you receive from your investment properties.
At Home Loan Experts, we can help you structure your investment loan to achieve your goals. Our brokers can calculate your rental yield for you and help you with your income strategy. Call us on 1300 889 743 or enquire online today.