What is rental yield?

Before purchasing an investment property, it is likely you will calculate the yield. Represented as a percentage on an annual basis, the yield on an investment details the future income you can expect to make. Along with helping you determine if the property is suitable for your financial goals, it will allow you to compare to other investments where returns may be measured as a percentage on an annual basis.

Understanding the terminology

You may hear different terminology used when discussing with experts in the property field. For example, you may hear a real estate agent speaking a lot about a property's return. While knowing the return on a property provides you with a picture of past performance, it does not help you understand the future earning potential that the property may provide.

The four main terms used to outline the earning potential of a property are:

·         Real estate yield: Measures the future income on an investment as an annual percentage. It's based on the cost or market value of the asset.

·         Gross rental yield: The gross income on an investment before expenses are subtracted. Expenses on a rental property can be significant, so sometimes there is a large variance between a property's gross and net rental yield.

·         Net rental yield: The income on an investment property after expenses have been subtracted. Typical expenses include purchasing and transaction costs and repair and maintenance costs.

·         Return: The total gain or loss on an investment over the holding period. This includes capital gains, and it's usually expressed in dollars or as a percentage based on the amount of profit made on the investment.

How do you calculate rental yield?

Visit our rental yield calculator:

https://www.luxepm.com.au/rental-yield-calculator

How do I calculate my net rental yield?:

annual rent of $18,200 ($350 x 52) - annual expenses of $2,500 / property value of $400,000 x 100 = 3.93%

How much should my rental yield be?

Your net rental yield should be suitable for your financial situation and your financial goals. If you're more focused on cash flow, you may choose a higher-yielding property with fewer prospects for rapid capital growth. In contrast, you may buy a property with significant capital growth potential but a lower rental yield. It depends on your goals and your risk appetite as each scenario will have its own set of considerations to review and analyse.

Even if you're not currently looking for a rental property, it's a worthwhile exercise to calculate the gross and net rental yield on your current properties to determine what changes you may be able to make to increase your yield. As always, make sure you speak with qualified finance and legal professional for tailored advice before you make any big changes to your finance and investments.

This is not by any means financial or legal advice. Please consult your professional advisors before making any financial decisions.

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