Rental yields - what you need to know
Rental yield is essentially the rate of rental income returned against the costs of an investment property, and can be a great indicator of a property’s investment potential.
First, it’s important to know that there are two types of rental yields - gross and net, and they are calculated differently.
In property, gross rental 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, the calculation will be:
$20,800 ÷ $450,000 = 0.0462
0.0462 × 100 = 4.622
Therefore, the gross rental yield is 4.622%
Generally, the higher the rental yield percentage, the better, as it suggests a more efficient return on your investment – less you would have to contribute to funding the property from month to month.
Knowing a property’s gross rental yield is a quick way to make a rough comparison of how its rental return fares with others in an area, but it can also be misleading as it doesn’t give the full picture.
Net rental yield, on the other hand, takes into account the costs and expenses you incur in addition to your property’s value. Lenders usually calculate net rental yield as approximately 80% of the gross rental yield. This is a rudimentary way to calculate the cost of maintaining a property.
Calculating rental yield should only be part of your assessment of a property’s investment potential though. To ensure you're making the right choice, it’s also important to consider the resale value, investigate market reports, demographics, sales and rental history of the area, planning and infrastructure, and the story of the building.
