Rental yield helps you measure the ongoing return on your investment property or properties and can help you compare your property portfolio to other investments.
This blog shows you how to calculate the gross and net rental yields, and gives you some quick tips on how to improve them.
Gross rental yield is the annual rent as a percentage of the investment price or value of a property.
If you are researching an investment property, working out the gross rental yield can give you a quick overview of how the property is likely to perform and how it will affect your overall cash flow.
To work out the gross rental yield, you will need two figures. The annual rental income and the property value.
Gross rental yield = (Annual rental income / Property Value) x 100
Remember that a buoyant or heated property market can mean that values rise quickly, but rental prices can stall, which will influence the gross rental yield.
Also bear in mind that gross rental yield does not take into account related expenses that you will incur by owning the property.
So a property with a high gross rental yield, but also very high expenses could actually leave you out of pocket.
The net rental yield will give you a more accurate estimation on how your investment property is likely to perform.
As well as the property value and annual rental income, you will also need the actual or estimated expenses you will incur by owning the property.
Example Ongoing Property Expenses
You will need to add up all these expenses so you can work out an accurate figure for your total annual expenses.
Once you have this figure, you can work out the net rental yield using this formula
Net rental yield = ((Annual Rental Income - Annual Expenses) / Property Value) x 100
Using the property example above, we could say that the annual expenses are $6,000.
Therefore the net rental yield would be
Working out the rental yield is one indicator you should look at when buying investment property. However there are obviously other factors to bear in mind as well, such as:
Firstly you can look at improvements you can make to the property that will mean you can increase the rent.
For example doing some partial or complete renovations, add a second dwelling, rent out the property to multiple tenants or consider your property as a holiday dwelling.
Secondly, you can find ways to minimise expenses.
For example, buying new or off-the-plan property can potentially mean less ongoing expenses compared to older investment properties.
Alternatively, you can consider managing your investment property yourself, rather than using a management company to do it for you.
Finally, you can see whether you can negotiate with your lender for a better interest rate, or get a borrowing assessment / finance check-up with a mortgage broker who can find and compare different rates / lenders for you.