What is rental yield?

Rental yield is the number used to indicate how much you make on an investment property.  It’s looks at the gap between your costs and income from renting your property out.  There are 2 types of calculations; Gross rental yield and Net rental yield.

Why look at rental yield?

Understanding how your property yield works will give you a better understanding of the ongoing return that you can expect to earn on your investment and in turn, whether or not your potential purchase is even financially viable.

Generally speaking, if you don’t calculate your rental yield, you can be at risk of making an investment that isn’t going to work out like you had planned.  You should also use both methods of calculating your rental yield; Gross and Net.  Let’s explore what each one means.

What is gross rental yield?

Gross rental yield is a more simplistic calculation of the investment yield.  It only takes into account the property value and the income received.  It does NOT take into account expenses that are incurred.

What is net rental yield?

Net rental yield is a more in depth calculation of the investment yield.  It takes into account the property value and property costs and the income received after your expenses into account.

How to calculate rental yield

The calculations of rental yield are fairly straightforward.  By using the above calculator you can get a good indication of your investment yield.  If you like to do it yourself, then the calculations for each are here for you to use.

Calculation of gross rental yield

Here’s how we calculate gross rental yield:

  1. Take the rent you receive and work out annual amounts.
  2. If you charge weekly: x 52.  If you charge monthly: x 12.
  3. Divide the annual rent amount by the value of your property.
  4. Muliply by 100 to get a percentage.
  5. Enjoy your rental yield number.

Simple!

Let’s take a look at a quick example:

If you receive $550 per week in rent.  We then have $550 x 52 weeks = $28,600 per year.  Youre property is worth $620,000.  Your gross rental yield is calculated as: ($28,600/$620,000) x 100 = 4.61%

Calculation of net rental yield

Calculating the value of your net rental yield takes a few more steps as you will now take into account expenses of the property.

Here’s how we calculate net rental yield:

  1. Add all the fees and expenses of owning your property (don’t include loan interest!)*
  2. Take the rent you receive and work out annual amounts.
  3. If you charge weekly: x 52.  If you charge monthly: x 12.
  4. Subtract the total fees and expenses from the annual rent.
  5. Divide this net received amount by the value of your property.
  6. Muliply by 100 to get a percentage.

Easy!

Why don’t we include loan interest?

It’s important to note that the interest that you pay on your investment loan isn’t usually included into the net rental yield calculations.  This is because it’s not considered to be directly related to the costs the property generates – it’s related to your own financial situation.

The net rental yield of a property is usually considered without loan interest to give an accurate representation of the property stand alone.  Anyone who owns that property would have a different financial situation and may have a smaller or larger loan (or luckily enough, no loan at all!).

What is a good rental yield?

A good rental yield depends on your property and where you plan to buy.  Average gross rental yields across both houses and units in capital cities are approximately 3%*, so more than that is considered above average.  If you have a unit, the average is about 4%.

*Numbers have been provided by SQM Research Gross Rental Yield which you can see all the values here in this great interactive chart.