What is a rental yield?

What is a rental yield?

As an informed investor, it is essential to know the return on the money you have committed.  In the property market this return on investment is known as the ‘rental yield’.  By understanding this concept, you will be able to use it to objectively assess your current and potential property investments.

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

 

Gross rental yield

To calculate this figure you need two pieces of information:

Annual rental income = weekly rent x 52

Property value = use the current market value to assess the current return, use a projected market value for a predictive return figure

Use this formula:

Annual rental income ÷ property value x 100 = x % Gross rental yield

Gross rental yield does not take into account any expenses associated with keeping the property – so it provides only a partial picture.  For example, a property might have a high gross yield but if the expenses are high then the true return will be lower.

 

Net rental yield

In addition to the annual rental income and property value, net rental yield factors in the expenses of owning and operating the investment property.  Things such as repairs, loan costs, rates, management fees insurances and so on.

This is a two step formula.

First:  Annual rent – annual expenses = Annual net rent

Then:  Annual net rent ÷ property value x 100 = x% Net rental yield

What is a good rental yield

Generally speaking, the higher the % the better the return.  However, this is only as accurate as the data used to calculate the rate.  So use the net rental method and include as many expenses as possible.

Also, you must compare like with like.  What might appear to be a low yield, may actually be quite good for the market in which the property is located.

With these things in mind, calculating the rental yield will be a useful tool in assessing the true value of investment properties.  How one property stacks up against another, and even how a property might stack up against other investment vehicles such as shares.  If you are planning renovations, use the tool to decide if the outlay is gong to reap a financial return.

 

Diane Bukowski
cloud@eezirent.com.au

When I first started my company eezirent I wrote a small online newsletter for private landlords in Australia. It explored the common problems landlords encounter when self-managing. This simple publication has now grown into Honest Broker.

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