| What is Rental Yield & How to Calculate it

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.

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.  This obviously helps you understand if the property is right for your investment goals.

It is important to research yields for different properties in different suburbs, so you can find a property with good rental yield.

How do You Calculate Rental Yield?
There are 2 Rental Yields that you need to calculate

  • Gross Rental Yield &
  • Net Rental Yield

“Gross Rental Yield”

The gross rental yield is a simple calculation. Here’s how you calculate a gross yield.

  1. What is the annual rent?
  2. What is the value of the property?
  3. Simply divide the annual rent by the value of the property.  Then multiply that figure by 100 to get your percentage figure.

So 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%

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 to get a percentage figure.

Calculating Your Total Property Expenses

Be sure to look at all your expenses.  These may include:

  • Repairs and maintenance
  • Management fees
  • Body corporate fees
  • Insurance
  • Rates and charges
  • 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.

Below is a Sample Net Rental Yield Calculation
So for example, let’s say you are receiving $30,000 a year in rent
You have $5000 a year expenses
You are paying $500,000 for the property. 
Your gross rental yield is 5%

$30,000 – $5000 = $25000
divided by $500,000 multiplied by 100

= 5%

What’s 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, Industrial)
  • Location
  • 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.

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.

If you would like more information about rental yield and how can it affect your property investment, please make contact with us.  We can provide you more details and suggestions about the property market.


Disclaimer:  Although all care is taken.  We do not give any warranty whatsoever to the accuracy of any content.
This is not meant to be financial or professional advice and is only of general nature.  You must seek professional advice before taking any actions. The above information comes with no warranties whatsoever.  We take no responsibility for any actions you may or may not take. All content is of general nature only and is NOT to be taken as advice whatsoever

Martin & Austin
Waldhoff

0422 426 065
MWaldhoff@areaspecialist.com.au

336 Main Road,
Glenorchy 7010 TAS

 

Martin & Hans recently welcomed the addition of a 3rd generation Waldhoff, Austin, into the team. Inviting him to learn from their 40 years’ experience in the real estate industry. Austin is keen to establish himself alongside these two reputable & knowledgeable representatives of the Hobart property market. Acting as their protégé & personal assistant for the time being as he strengthens his skillset regarding client management, negotiations, and legal procedure.

Martin brings 15 years of experience to the table and prides himself on negotiating the best outcomes for his clients. Empowering his vendors with the most modern marketing strategies available during the listing and selling of their property. Being a strong supporter of local produce and community growth, Martin is a member of the New Town Community Association & other groups. He’s down-to-earth, literally & figuratively, enjoying spending time in the garden as much as inside your home to help evaluate its place on the market.

Hans has been in real estate for 25 years. Receiving multiple awards as Tasmania's No. 1 Salesperson during his reign as 'King of the Hill' in Sandy Bay. Previously a civil engineer and accredited valuer in Germany, Hans has a deeper understanding of property than your average agent, and you'll find his insights invaluable whether you're buying or selling property in Hobart. Now over 80 years old, Hans’ enthusiasm for real estate has never waned and he continues to prove himself as one of PRD’s top salespersons monthly, effectively bolstered by his son & grandson.

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