Understanding rental yield is crucial when evaluating investments. There are two methods to calculate rental yield: Gross rental yield and Net rental yield. Learning how to calculate rental yield informs you about the potential profitability of an investment.
Similar to your salary, which consists of gross pay and net pay, a property’s gross rental yield represents the income generated before accounting for expenses. It’s comparable to the amount you receive from your employer before tax deductions.
The net rental yield can be likened to the salary deposited into your account, reflecting your net pay after deducting taxes. It represents the income generated by a property after factoring in expenses.
Determining what constitutes a good rental yield is subjective and depends on individual investor goals. However, many consider a gross rental yield of 4% – 5% as a favourable benchmark.
How To Calculate A Rental Yield
To calculate rental yield for a property, simply take the weekly rent and times it by 52 (52 weeks in a year). Then divide this annual income figure by the purchase price of the property. By then multiplying this by 100 you get a percentage.
What is good rental yield is ultimately subjective depending on the property type and several factors. These factors are covered more extensively in Buying an investment property in Australia.
How to Calculate a Gross rental yield
- Investment property purchase price is $500,000
- Expected property rent is $420 per week
- The gross rental yield is the annual rental income ($420 x 52) = $21,840 / $500,000 x 100 = 4.37%
How to Calculate Net Rental Yield: Understanding the Costs Involved
Understanding a property’s net rental yield can be very important, especially when considering certain property types. Net rental yield as discussed example is the properties annual income less than any associated costs with holding that property (with some exceptions).
Some of these fees include:
- Insurances – Home and Landlord Insurance
- Strata Fees
- Body Corporate Fees (Including sinking fund)
- Vacancy Costs
- Repair costs
- Property Management fees
- Legal Fees
- Building inspection fees
- Council and water rates
- Maintenance fees
Here are some typical property associated costs:
- Agent Management Fees: (@ 6.6% of weekly rent, 3 x yearly inspection, admin, and establishment fees) = $1736
- Council Rates: $1942
- Water Supply Charge: $271
- Insurance (building and landlord): $1400
Net rental yield for the same example
- The same Investment property purchase price is $500,000
- The expected property rent is $420 per week
- Total yearly expenses = $5349
- The gross rental yield is the annual rental income ($420 x 52) = $21,840 – expenses $5349 / $500,000 x 100 = 3.30%
Rental Property 8-12% Yield? What to Look Out For!
Probably, yes, but that is not definitive. Often these levels of yield are promised and associated with certain property types and appeal largely to investors only. Other examples of higher returns are those properties located in mining towns.
Mining town properties come with significant risk and if timed correctly significant rewards. Often these houses can be rented out for significantly higher rates than that of your average suburban equivalent in any major city.
Furthermore, these property prices may also grow during the boom cycles.
Conversely however, the risk is significant especially if the associated industry declines or disappears – so will the rent and property value! This was seen in Perth during their last mining boom.
People that timed it right made huge financial gains with those who held the properties at the bust end of the cycle had significant debts with vacant or heavily discounted rental prices.
Properties that advertise such high returns often have hidden associated costs that without proper due diligence could lead to an individual not getting the return they expected. These properties are typically serviced apartments, Uni Student Accommodation, or similar.
These property types are often appealing to investors as the entry to market can be quite low – in some cases $50,000 – $150,000 depending on location and promise significant returns.
However, due diligence is required as whilst the rent per week may be very attractive, they may come with higher vacancy rates, management fees, body corporate fees, and in the case of serviced apartments cleaning fees!
When I first looked and investing I was drawn to this area of the market. The high gross yields, and low cost entry in purchasing my first piece of real estate were super attractive. But the more I looked into the less appealing it became.
As highlighted above, the fees quickly mount up and the cleaning fees after every guest visit quickly add up. Furthermore, banks typically either do not lend on this property type at all or require a significant contribution towards the loan-to-value ratio (LVR).
Low Rental Gross Yield, High Potential Growth: Is It Worth Considering?
How low you would ultimately go would be an individual choice dictated by your personal circumstances. In today’s market (2023), serviceability for many is very important so good rental yield needs to go some way towards paying off the mortgage.
For many, it is simply not possible to find a positively geared property with the current RBA cash rate at 3.6% (at the time of writing) with mortgage interest rates in the 5-6%s.
Some reasons to consider a lower gross-yielding property is the potential higher capital growth you may expect it to return in the longer term.
Often properties in the more premier suburbs or bluechip suburbs attract a heftier price tag but the rental returns lag. – Picture some of the more affluent suburbs in your city. The house may be worth approx. $1-1.1million but the rent is $800 per week.
That’s a gross return of 3.78% at a $1.1 million valuation.
Therefore, an individual’s context surrounding their goals and objectives is very important. A retiree or a person in the latter stages of their working life may have very different financial objectives to that of a person in their 20s,30s, etc.
Typically, people younger in age will look for a balance between growth and income (tilted more towards capital growth), with those older looking for capital growth but also stronger income returns.
Rental Yield Calculator
If you want to calculate your rental yield, download our free rental yield calculator. This rental yield calculator allows you to compare up to 3 different scenarios.
To calculate the gross rental yield simply enter the expected purchase price information as well as the expected rental income.
To calculate the net yield simply enter the expected purchase price information, expected rental income, as well as the potential rental expenses. The spreadsheet allows you to not only select the dollar amount but also the frequencies of these expenses.
Additionally, the net yield calculator has listed typical rental expenses associated with owning a real estate investment.
Overall, the rental yield calculation should allow you to figure what’s a good rental yield for your personal situation.