February 08, 2016
Whether you are a seasoned property investor or looking to invest in property for the first time, understanding what 'rental yield' means is important to investing successfully.
Rental yield is best explained as the rate of income return over the cost associated with an investment property and is usually expressed as a percentage.
Types of rental yield
Gross rental yield is simply the annual rental income (weekly rent x 52) divided by the property value (purchase price or market value) expressed as a percentage.
For example, a property that was purchased for $420,000 and rents for $450 per week would have a gross rental yield of 5.6%.
($23,400 / $420,000) x 100 = 5.6%
Gross rental yield is a good way to compare different property values, locations and rental returns, thus it is most commonly seen in published property data and property reports.
Net rental yield takes into account a lot more factors - both known and estimated - to give a more accurate rental return.
These factors include; -
Ongoing expenses - Added together to calculate a total annual expense figure: -
- Mortgage interest repayments
- Repairs and maintenance
- Strata levies
- Council rates
- Property management fees
- Loss of rent
Total property cost - Added together to calculate a total property cost: -
- Purchase price / market value
- Loan costs
- Building and pest inspections
- Stamp duty
- Legal fees
The net rental yield is then calculated as follows.
[(Annual rental income - Annual expenses) / Total property cost] X 100.
It is important to note that a property's net rental yield will vary greatly depending on how much you borrow and is just one of many factors to consider when investing in property. This is why getting professional mortgage and taxation advice is vital before you purchase an investment property.
To find out more about your property investment options please call us today on 03 9432 6070 or contact us online at the top of this page.