Understanding Rental Yield

Understanding rental yield is essential for property investors, as it directly influences key factors like cashflow, return on investment, and overall financial strategy. By gaining clarity on rental yield, you can make confident, well-informed decisions about choosing the right property and locations to achieve your financial goals.

This article covers everything you need to know about rental yield, from its definition, its types and how it is calculated, to its importance, what is considered a good rental yield and ways to maximise it.

What Is Rental Yield?

Rental yield is the amount of income your property generates relative to its value, expressed as a percentage. It serves as a key indicator of a property’s earning potential and ROI.

There are two types of rental yield: gross rental yield and net rental yield.

• Gross Rental Yield: This is the annual rental income as a percentage of the property’s market value, calculated before deducting any expenses. Knowing the gross rental yield is useful for identifying properties that meet your minimum yield criteria. It’s a great starting point for comparing investment opportunities and identifying properties.
• Net Rental Yield: This is the annual rental income after accounting for property-related expenses such as maintenance, insurance and taxes. By carefully tracking these costs, you can better understand your property’s long-term financial performance and decide when to hold or sell.

Gross yield provides a quick overview for initial evaluations, while net yield offers a deeper analysis of profitability. We’re here to make these calculations easier for you, empowering you to assess profitability with confidence.

The expenses used in calculating net rental yield are:

• Property management fees
• Property insurance
• Maintenance costs for repairs and renovations
• Vacancy costs
• Advertising costs
• Strata fees
• Legal fees
• Property taxes

How To Calculate Rental Yield

Calculating rental yield doesn’t have to be daunting. Here are simple formulas to calculate rental yield:

• Gross Rental Yield: (Annual Rental Income / Property Value) × 100
• Net Rental Yield: [(Annual Rental Income – Expenses) / Property Value] × 100

Example Calculation

• Property Value: $600,000
• Annual Rental Income: $30,000
• Expenses: $6000
• Gross Yield = ($30,000 / $600,000) × 100 = 5%
• Net Yield = [($30,000 – $6,000) / $600,000] × 100 = 4%

Note that taxes and costs associated with loan interest aren’t usually included in expenses for this calculation. Remember, calculating net rental yield requires accurate expense tracking, and we’re here to help you get it right.

Why Is Rental Yield Important?

Rental yield plays a pivotal role in property investment by:

• Evaluating Performance: It measures how effectively a property generates income.
• Comparing Options: Helps investors decide between high-yield properties and those with high capital growth potential.
• Optimising Cashflow: Yield influences whether the property covers its costs or requires additional financial support.

For instance, properties with a 6% yield may be more attractive than those with just 4%, especially for cashflow-focused investors.

Factors Affecting Rental Yield

There are several factors that affect rental yield, such as the location of your investment property, the price of the property and supply and demand. Here are the top nine factors that affect rental yield:

• Property Valuation: As property prices increase, gross rental yields may decrease, since the rental income does not always rise at the same pace.
• Location: Properties near shopping centres, schools, parks and public transport tend to attract higher rents. Areas with low crime rates and good community service can draw premium rental yields.
• Expenses: Costs like maintenance, insurance and taxes decrease net yield.
• Supply and Demand: High demand and low supply in a specific area can lead to increased rents, while oversupply can drive rents down.
• Property Type: Some property types, like apartments, may have lower maintenance costs, which can enhance your net yield, while others may incur higher expenses that reduce profitability.
• Vacancy Rates: High vacancy rates directly reduce the potential gross rental income, leading to lower gross yields.
• Interest Rates: Higher financing costs due to rising interest rates can reduce cashflow for investors after expenses are accounted for, negatively affecting net yields.
• Tenant Profile: A tenant demographic willing to pay more can lead to higher gross and net rental yield.
• Infrastructure Development: While infrastructure improvements may increase rents, they can also lead to higher property taxes and maintenance costs that might reduce net yield.

For example, suburbs in Brisbane and Adelaide often yield higher rental returns compared with Sydney’s prime locations.

What Is A Good Rental Yield?

A good rental yield in Australia is typically between 5% and 8% – this will depend on the property type and the location. Yields are typically better for some types of properties or locations than others, so it’s necessary to compare yields of properties in the same category to judge which yields are best.

• Residential Properties: Typically 5%-6% in Australia.
• Commercial Properties: Often exceed 8% due to longer leases and higher risk.
• Regional Areas: Tend to have higher rental yields of above 10%.

CoreLogic’s 2023 Quarterly Rental Report states that Sydney has the highest rents of all the capital cities. The median rent in Sydney is above $2000.

Is 5% A Good Rental Yield?

A 5% rental yield is decent and may provide a steady income. While it is above the average yields seen in many capital cities, which often range from 2.6% to 4.5%, it is lower than the yields typically found in regional areas, where good yields can range from 10% to 13%.

How to Maximise Rental Yield

Investors can use various tips and strategies to increase net and gross rental yield.

One way is to upgrade the property’s features by renovating the kitchens and bathrooms and prioritising maintenance. Fresh paint in neutral colours, professional cleaning, and fixture repairs can greatly improve appeal and help command a higher rent. Converting unused spaces into extra bedrooms and increasing storage options are also effective strategies to attract a broader tenant base. Additionally, consider allowing pets, as many tenants are willing to pay more for pet-friendly homes.

You can read our page on tips to increase rental yield for more information.

Ready to Invest?

Rental yield is more than a number – it’s a gateway to smarter investments and long-term financial security. At Home Loan Experts, we’re passionate about helping you succeed, whether you’re new to property investment or refining your strategy. Contact us today on 1300 889 743 or fill out our free online assessment form. We’ll help you make confident, well-informed choices.