If you are a property investor, there is one very important calculation to be aware of and understand – rental yield.
What is Rental Yield?
Rental yield is the annual rental income you can expect to receive from a property you own as a percentage of the property’s value. This is so important for investors because it helps you work out how much return you will get on your investment. If your rental yield is higher, you can expect to earn more from the property and you can use this rental yield metric to compare different property investment options and their potential returns.
Calculating Rental Yield
To work out the rental yield on a prospective property investment, you simply divide the annual rental income you will receive by the property’s value and multiply that by 100. As a simple example, if your investment property costs you $600,000 to buy and generates $50,000 in annual rental income, the property has a rental yield of 8.3 per cent. Rental yield = ($50,000 / $600,000) x 100 = 8.3%.
Gross vs. Net Rental Yield
When you calculate your rental yield this way you are working out the “gross rental yield”. Gross rental yield does not take into account any money you have to part with by owning and maintaining the property. To get a more in-depth and accurate idea of your returns on an investment, you can work out the “net rental yield” by taking into account those expenses. Using the same previous example, if the $600,000 property will receive $50,000 in annual rental income but you have to spend $10,000 on maintenance costs, then the net rental yield will be 6.6 per cent. Net rental yield = [($50,000 – $10,000) / $600,000] x 100 = 6.6%.
Maximising Rental Yield
As a property investor it is best to look for property opportunities with a high net rental yield to ensure solid returns on the investment. Property location is one of the key things to look for when trying to maximise rental yield. Those in obvious high-demand areas where there is not many rentals available will likely return higher rental yields. The other key to look at is the age and condition of the property. As discussed with net rental yield, there is not much gain in having a high gross rental yield if most of it gets eaten up in costly maintenance expenses. Therefore, newer properties often have a higher net rental yield for investors.
