Rental yield is one of the most well-known metrics among Australian property investors, particularly in the ever-changing real estate market. Understanding how to calculate rental yield is crucial for analysing the profitability of investment properties. This article will go over all the details on rental yield calculations and provide practical insights for Australian investors.
What is rental yield?
Rental yield refers to a return on investment achieved through rental income. This figure is crucial for investors to understand how much income is compared to its cost, helping them determine that rental yield is valuable as an investment.
Why is rental yield important for Australian investors?
Rental yield plays an important role in helping investors assess whether rental property is a viable investment or not. In Australia, where property cost has been high in history, to make sure you know about the rental yield, you’re making a wise property decision. It also allows you to compare different properties and markets and weigh the benefits of potential capital growth against regular income.
Types of rental yield
Mainly the type that every property investor calculates as rental yields, you know.
- Gross rental yield: This is calculated before deductions such as property management fees, repairs, and maintenance. While it provides a basic indicator of profitability, it does not account for expenses.
- Net rental yield: This takes into account all expenses, providing a more accurate measure of actual returns.
How to calculate rental yield correctly
Step 1: Calculate the annual rental income
The first step in calculating the rental yield is to determine how much property generates rental income on an annual basis. You can divide your weekly income by 52 (total weeks in a year).
Formula: Annual rental income = weekly rent x 52
Example: If a property earns $500 per week in rent: Annual rental income = $500 x 52 = $26,000
Step 2: Determine the property’s value or purchase price
Next, determine the property’s current market value or the price paid at purchase. That value is the one mainly used by investors to calculate their rental yields. If you do not know the value of the property, the best recourse would be to source recent comparable sales in the area or consult a local estate agent.
Example: If a property was purchased for $500,000, this value is used in calculations.
Step 3: Calculate gross rental yield
Gross rental yield is determined by dividing the annual rental income by the property’s purchase price and multiplying the result by 100 to express it as a percentage.
Formula: Gross rental yield = (annual rental income / property value) x 100
Example: Gross rental yield = ($26,000 / $500,000) x 100 = 5.2%
So, in this case, the gross rental yield would be 5.2%.
Example of rental yield calculation in Australia
Let’s go through a real-life example to better understand how to calculate rental yield.
Example 1:
- Weekly rent: $600
- Property value: $700,000
- Annual rental income: $600 per week multiplied by 52 weeks equals $31,200
- Gross rental yield = ($31,200 / $700,000) x 100 = 4.46%
So, the gross rental yield for this property is 4.46%.
Factors affecting rental yield
Several factors influence rental yield, including:
- Property location: Properties in high-demand areas or close by amenities such as schools, transport, and shopping centres typically have lower yields but higher capital growth potential.
- Property type: Apartments and houses usually yield different kinds of returns. Units in certain urban areas may offer higher yields as compared to houses located in the suburbs.
- Market conditions: The broader property market cycle can hurt rental yield. Profitable times in the cycle see falling yields from rent while prices appreciate, while in lean times, yields may increase as prices fall.
Conclusion
For Australian property investors, rental yield computation is essential. Knowing gross and net rental yields will help you make wise real estate investing selections regarding where or when to put money. Rental yield is a crucial metric whether your goals are long-term capital growth or income maximising. But for the best purchasing decisions, all factors impacting the yield should be included and used in conjunction with the other measures. Knowledge of rental yield estimates will strengthen your property investment plan and ultimately support a much steadier and more successful portfolio.
