As part of assessing the investment potential of a property, it is important to determine the “Rental Yield”. This is one of the best financial indicators of an investment property.
WHAT IS RENTAL YIELD?
Rental Yield is a quick calculation of what you will make on your investment property, shown as a percentage figure . The basic premise is to calculate the difference between your costs and the income you receive from the property.
By accurately calculating your property rental yield, it will give you a clear indication of your ongoing returns. It is important to research yields for different properties in different suburbs. This obviously helps you understand if the property is right for your investment goals.
HOW TO CALCULATE RENTAL YIELD?
There are 2 Rental Yields that you need to calculate Gross Rental Yield & Net Rental Yield
GROSS RENTAL YIELD
Let’s firstly look at “Gross Rental Yield”The gross rental yield is a simple calculation.
Here’s how you calculate a gross yield.
- What is the annual rent?
- What is the value of the property?
- Divide the annual rent by the value of the property.
- Multiply that by 100 to get your percentage figure.
For example, let’s say you are receiving $30,000 a year in rent and you are paying $500,000 for the property. Your gross rental yield is 6%
$30,000 divided by $500,000 multiplied by 100 = 6%
A rental yield is an important tool to use, but by no means the only consideration when assessing an investment property. Higher rental yield may provide a better cash flow, however, high rental yield should not be the only reason to invest in a particular property. Sometimes high yielding properties can come at a cost of decreased capital growth.
It is important to focus on the big picture and your long term investment strategy. Consider your total return over a period of time.
NET RENTAL YIELD
Net Rental yield is a more accurate, and therefore more important because this also includes the costs to maintain and rent the property.
This is how to calculate a net yield.
- Add together all your costs
- Calculate the annual rent
- Subtract the total costs from the total income from your property
- Then divide that figure by the value of your property
- Finally Multiply the resulting figure by 100
Calculating Your Total Property Expenses.
Be sure to look at all your expenses. Including:
- Repairs and maintenance,
- Management fees,
- Body corporate fees,
- Vacancy costs.
As a general rule, a net yield doesn’t take into account your interest costs. Interest relates to your financial position and not the ‘business’ of your investment property. Interest costs are also normally a tax deduction.
WHAT IS A GOOD YIELD?
There is no definitive answer to this. It depends on a wide range of individual factors. For example:
- Your investment strategy (cashflow or capital growth)
- Your income and tax liability
- Class of property (Residential, Commercial etc)
- market conditions, Economic outlook of the area.
As a rough guide, according to the Commonwealth Bank of Australia, investors should be aiming for a rental yield of 5% or above.