Knowing how to calculate rental yield will help you plan your investment goals for the future. Rental yield refers to the rental income you receive from your investment property. It’s calculated as a percentage, comparing the total annual rental income you receive to the property value.
It’s good to understand your property yield so that you know the return on your investment. It may seem like it’s doing well, but running the numbers can help you determine if you’re earning a decent rental yield or whether you should reconsider your investment strategy.
Here’s everything you need to know about calculating rental yield and what to do with the numbers once you’ve got them.
How To Calculate Gross Rental Yield
Calculating your gross rental yield is a broad overview that can be used to measure your returns. It expresses your property’s total annual rental income as a percentage of its purchase price.
Here’s how to calculate your property’s gross rental yield:
- Work out the total annual rent that you will receive from your tenant.
- Divide this total by the property value.
- Get the percentage by multiplying that number by 100.
Calculating Gross Rental Yield Example:
Dominique receives a total of $45,000 for the rent of her property each year. This property is worth $600,000.
She can work out her gross rental yield using this equation:
(Total annual rent) ÷ (property value) X 100
$45,000 ÷ $600,000 X 100 = 7.5%
Therefore, Dominique’s gross rental yield is 7.5%.
How To Calculate Net Rental Yield
Calculating your net rental yield is more complicated, but the result is a more accurate depiction. You should begin by calculating all your annual property expenses. These can include:
- Council rates
- Insurance
- Property management fees
- Repairs and maintenance
- Strata levies (if any)
Once you have a total, you can calculate your property’s net rental yield:
- Work out the total annual rent that you will receive from your tenant.
- Subtract the total property expenses from your annual rent amount.
- Divide this total by the property value.
- Get the percentage by multiplying that number by 100.
Calculating Net Rental Yield Example:
Dominique decides to calculate her net rental yield to be more specific. She determines that her annual property expenses amount to $15,000.
She can work out her gross rental yield using this equation:
(Total annual rent – annual property expenses) ÷ (property value) X 100
($45,000 – $15,000) ÷ $600,000 X 100 = 5%
What Is a Good Rental Yield?
Although it may be evident that you want a higher yield to receive a better cash flow, a high rental yield could also run the risk of lower capital growth potential for properties within that particular area.
A low rental yield of between 2-4% could mean that the property is more of a growth property rather than a yield property. Although it might not produce a significant profit, it may lead to superior capital growth because it’s in a popular area that will likely grow.
A good rental yield to aim for in capital cities should fall between 5.5-7%, and Australia’s regional areas perform even better.
Investors can use online tools for property market research to help them understand data on suburbs and properties in a particular area. Before buying a property as an investment, research information about the area’s:
- Average rental yield
- Expected rental income
- Suburb price trends
- Demographics
Can Negative Be Positive?
Buying an expensive investment property doesn’t necessarily mean you’ll receive a high annual rental income. Many investors who have properties with a high-price point receive a low rental yield and cannot cover their costs using rental income alone. This is known as negative gearing.
There generally won’t be good yields if you buy in an area where most people are owner-occupiers rather than lease out. For example, a $5 million home on the water will have a low rental yield compared to a $300,000 house in Darwin.
But, the benefit of negative gearing is that you can offset any loss from your property during the financial year against your income. This reduces your taxable income and the amount of tax you are required to pay.
Properties with a high rental yield can be utilised for positive gearing to supplement your regular income with a rental return and produce a positive cash flow. Negative gearing is a good option for investors more focused on capital growth potential than the cash flow from their property.
Why You Should Use a Mortgage Broker
If you’re considering buying a second property, a mortgage broker can elevate your property investment journey thanks to their knowledge.
A mortgage broker specialising in investment property will help you get the right home loan product that suits your goals and maximises the return on investment.
These professionals will explain all the costs involved in the loan and calculate the expenses involved to determine your potential borrowing power. Plus, they can identify lenders that suit your budget and help you through the application process.
Essentially, mortgage brokers have the expertise to help you create an investment strategy. Once you’ve been approved for the home loan, it doesn’t have to be the end of the road—your mortgage broker will help you ensure that the return on investment is enough so that you can continue to grow your investment property portfolio.
Contact The Mortgage Agency Today
Both first-time and seasoned property investors can benefit from using a mortgage broker.
We have professionals at The Mortgage Agency that can help you assess your financial situation to determine what you want to achieve as a property investor.
We will explain in detail how property yield works and help you accurately calculate your gross rental yield and net rental yield before buying a property. That way, you can make an informed decision on whether it meets your investment goals.
Before going ahead, contact an experienced mortgage broker today and make an informed decision.
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.
