Rental Yield: What You Need To Know

For property investors in Australia, rental yield is a term that is commonly used to describe the amount of income generated by a rental property, expressed as a percentage of its purchase price or current market value. In simple terms, it is the return on investment that a property owner can expect to receive from their rental property.

Rental yield is an important metric for property investors, as it helps them to determine whether a property is a good investment or not. A high rental yield means that the property is generating a good income compared to its value, while a low rental yield may indicate that the property is not generating enough income to make it a worthwhile investment.

There are two main types of rental yield that property investors in Australia should be aware of: gross rental yield and net rental yield.

Gross Rental Yield

Gross rental yield is calculated by dividing the annual rental income by the purchase price or current market value of the property, and then multiplying the result by 100 to get a percentage. For example, if a property is purchased for $500,000 and generates $25,000 in rental income per year, the gross rental yield would be calculated as follows:

$25,000 ÷ $500,000 x 100 = 5%

Net Rental Yield

Net rental yield, on the other hand, takes into account the costs associated with owning and renting out a property, such as property management fees, maintenance costs, and insurance premiums. To calculate net rental yield, property investors subtract these costs from the annual rental income, and then divide the result by the purchase price or current market value of the property, before multiplying by 100 to get a percentage.

For example, if a property is purchased for $500,000 and generates $25,000 in rental income per year, but incurs $5,000 in costs associated with owning and renting out the property, the net rental yield would be calculated as follows:

($25,000 – $5,000) ÷ $500,000 x 100 = 4%

What is the difference between gross and net rental yield?

While gross rental yield provides a quick and easy way to compare the potential returns of different properties, it is important for property investors to also consider the net rental yield, as this takes into account the costs associated with owning and renting out a property.

What factors influence rental yield?

There are a number of factors that can affect rental yield, including the location of the property, the condition of the property, the type of property (e.g. house, apartment, or townhouse), and the rental demand in the local area. In general, properties located in areas with high rental demand and low vacancy rates tend to have higher rental yields, as there is greater competition among renters for available properties.

It is important for property investors to remember that rental yield is just one of many factors to consider when evaluating the potential returns of a property investment. Other factors to consider include capital growth potential, rental vacancy rates, and the costs associated with owning and managing a rental property.

In conclusion, rental yield is a key metric for property investors in Australia, as it provides a way to measure the return on investment of a rental property. By understanding the different types of rental yield and the factors that can affect it, property investors can make informed decisions when evaluating potential investment opportunities. However, it is important to remember that rental yield is just one factor to consider, and should be evaluated alongside other important metrics such as capital growth potential and rental vacancy rates.

Author: Shane