Rental Yield
Operating analysisRental yield metrics provide insights into the return on investment generated from renting out a property and can help understand the return you can expect on your investment.
What is Rental Yield
Understanding rental yield can help you work out which properties and suburbs might be worth investing in. Let's explore what rental yield is, how to calculate it, what classifies a 'good' rental yield, as well as other important things to consider.
Types of Rental Yield
Understanding rental yield can help you work out which properties and suburbs might be worth investing in. Let's explore what rental yield is, how to calculate it, what classifies a 'good' rental yield, as well as other important things to consider.
- Gross Rental Yield
Gross rental yield is a basic measure that represents the annual rental income generated from a property as a percentage of its total cost.
- Net Rental Yield
Net rental yield on the other hand takes into consideration the cost of operating the property along with the income.
Calculating rental yield
Gross Rental Yield
Calculating Gross rental yield is easy, simply muliply the weekly rental income by the total number of weeks and then divide by the price. Lets look at an example:
- George purchased an investment property for $600,000
- He rents it out at $450 per week
Formula
(rent * 52) / price($450 * 52) / $600,000$23,400 / $600,000 = 0.0390.039 x 100 = 3.9%George's investment generates a 3.9% return annuallyNet Rental Yield
Similar to calculating Gross rental yield we need to calculate the yearly rental income, however now we need to also add in the expenses we will incur for owning this property.
Since it is not generally possible to always predict every expense a property may have, we developed formula that accounts for the general costs that every property incurs. The costs we include are listed below:
- Property management fee (7% average)
- Rates
- Land taxes
- Body corporate (If applicable)
- 2 Week vacancy a year
Let's compare with the initial example with the following additions:
- Rates $650 per annum
- Land tax $900 per annum
- Body corporate fees $1250 per annum
Formula
(((rent * (1 - managementFee)) * 50) - (rates + landTax + bodyCorporate)) / price(($450 * (1 - 0.07)) * 50) - ($650 + $900 + $1250) / $600,000($20,925 - $2,800) / $600,000 = 0.0300.030 x 100 = 3.0%George's investment generates a net 3% return annuallyImmediately we can see that when including the costs George's return has dropped by close to 1% a year which can be a significant difference.
It should be noted that there will likely be additional costs to the ones we include meaning the return would be lower.