Are you considering investing in residential rental properties or commercial property? Maybe you thought your home would make a great rental but you’re not quite sure. Or perhaps you are just curious about the basics of what is rental yield and how it’s calculated.
Don’t stress. Calculating rental yield might be a little intimidating at first, but it’s actually very simple. Knowing a property’s rental yield is also crucial to making smart and informed investment choices.
Here we break down the basics of what is rental yield and how to work out the rental yield on your own. We will also look at what is considered an “ideal” rental yield for various Australian cities.
What is Rental Yield?
Firstly, let’s talk about what is rental yield. Basically, rental yield is the return on your rental property investment, usually expressed as a percentage. There are two types of rental yield:
- Gross rental yield
- Net rental yield
Gross rental yield is the amount of money earned from rents before vacancy, repair costs, and other expenses. Net or “effective” rental yield is the money earned from an investment after all expenses are considered. These expenses include vacancies, repairs, management, and legal fees, taxes, and utilities.
How to Calculate Rental Yield
Rental yield can be calculated using a variety of tools or on your own using a very simple formula.
How to work out gross rental yield
First, let’s look at the general calculation for gross rental yield.
Divide your annual rental income by the total value of the property (the appraised value minus any outstanding mortgage). For example, if your annual rental income is $70,000 and you owed on the property for 80% of its value of $500,000, then you would perform the following calculation:
70,000 divided by 400,000 (80% of 500,000) = a gross rental yield of 17.5%
How to work out net rental yield
Next, let’s calculate the net “effective” rental yield.
To do this calculation, we need to deduct any potential vacancy or repair costs and other expenses from our gross lease. So the formula would appear as below:
Annual rental income – annual expenses / total property cost = Net/Effective Yield
Let’s use the gross rental yield example above. If this property had an annual total of $25,000 for expenses, the net rental yield could be determined with the below calculation:
45,000 (income minus expenses) divided by 400,000 = a net/effective rental yield of 11.25%
This is a very watered-down version. The effective rental yield is a more complex calculation that requires in-depth knowledge of all your expenses. However, it provides a far more accurate rental yield value. Fortunately, there are numerous rental yield calculators to help you with these calculations, such as the one below.
Rental Yield Calculator
What is the Best Rental Yield in Australia?
After you have calculated your gross and net/effective rental yield, how do you know if it signifies that a property is a good investment? Of course, you have to consider a lot about a property before investing. However, when it comes to rental yield, it’s best to see how the property compares to the rest of its market or suburb.
What Is A “Good” Rental Yield?
Investors typically want the highest yield possible, but you also have to consider the property’s features and costs. Some investors are satisfied with a lower yield due to the property’s location or distinct features that make it more desirable. While other investors want a high gross rental yield if the upkeep costs are expected to be high.
For instance, if you’re investing in one of Australia’s more expensive cities, such as Sydney or Melbourne, you’ll have a higher price point to consider. This extra cost includes the purchase price and the extra variables, such as insurance, management and maintenance. For this and other reasons, lower-cost areas generally have higher net/efficient rental yields, because they generate more revenue per dollar spent.
With that said, savvy investors typically try to find investment properties that have a rental yield higher than 5%. Anything under that and it is assumed that the property is overvalued.
Let’s look at some of the best rental yields across cities in Australia in 2021 according to OpenAgent.com:
- Canberra – Phillip suburb at 6.52%
- Sydney – Warwick Farm suburb at 4.92%
- Regional NSW – Wellington suburb at 9.71%
- Brisbane – Edens Landing suburb at 8.05%
- Melbourne – Carlton suburb at 6.35%
Surprised by any of these? Understanding what the rental yield is, how to calculate it and what a “good” yield rate gives you better direction and insight when investing in property. This is just a small sample size, but you can already see that there are areas across Australia worth investigating.
If you want to increase your rental yield or make smarter investments, schedule a call with the experienced Business Development Manager at Platinum Property Management Group on 1300 781 559. Having a review of your investment property or portfolio is exactly what you need right now.
Data were taken from CoreLogic. Data reflects January to December 2020 period and suburbs must have at least 30 sales and 30 rental listings in the last 12 months to be included in the list.