Rental Yields - Property 101
- Bernadine Higgins
- Apr 8, 2024
- 3 min read
What is Rental Yield?
Rental yield is the calculation used to measure the return on investment (ROI) generated from a property through rental income - basically the gap between overall costs and income received. It indicates the annual income generated from renting out a property as a percentage of its purchase price or market value. Rental yield provides valuable insight into how much income property is generating relative to its cost.
Why is Rental Yield Important?
Understanding rental yield is crucial for you as a property investor, for several reasons:
Profitability Assessment: Rental yield helps you assess the potential profitability of a property. By comparing rental income to the property's value, you can determine whether the investment is likely to generate satisfactory returns.
Cashflow Management: If you are relying on the rental income for cashflow, understanding the rental yield is crucial for budgeting and financial planning. By estimating rental yield accurately, you can ensure that the property generates sufficient income to cover expenses and you are above to hold a property long-term.
Comparison Tool: Rental yield allows you to compare the potential returns of different investment properties. By calculating the rental yield of multiple properties, you can identify the right type of property and the right location to get the best return on your property dollar.
Risk Management: Rental yield serves as an indicator of the stability and sustainability of rental income. Properties with higher rental yields relative to their value may offer greater protection against fluctuations in the rental market or unexpected expenses. A low rental yield may indicate a property is overvalued or expenses are eating into potential profits.
How is Rental Yield Calculated?
Gross Rental Yield – is the most basic form of yield calculation.
(Annual rental income / Property value) x 100% = Gross rental yield
Let's illustrate this with an example:
Example:
($750 rent per week gives you $39,000 annual rent divided by $800,000 property value) x 100 =
4.875%
Net Rental Yield – is a more accurate representation as it accounts for the expenses associated with owning and operating a property. These include Council rates, water, insurance, strata levies, property management fees, repairs, and maintenance.
This amount is subtracted from the rent received to provide an accurate rental yield and return on investment.
Example:
($39,000 annual rent minus $7500 expenses divided by $800,000 property value) x 100 =
3.93%
To make it even easier – click on the link to bring up a calculator on screen.
Interpreting the Results:
In this example, the rental yield for the property is 3.93%. This means that for every dollar invested in purchasing the property, you can expect to receive approximately 3.93 cents in rental income annually.
Conclusion:
Rental yield is a critical metric for property investors, providing valuable insights into the income-generating potential of an investment property. By understanding how to calculate rental yield and its significance, you can make informed decisions, maximise returns, and mitigate risks.
It is important to understand that rental yield is only one aspect to consider when studying property as an investment vehicle and the interpretation of what is a “good yield” will differ dependent on your goals and your strategy.
5Keys is here to assist you in your journey of property investment – get in touch with Bernadine today for a free chat on where we can help.
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