How is rental yield calculated?

October 20, 2022

Rental yields are a measure of how much income an investment property generates compared to its purchase price. The higher the rental yield, the more income the property generates relative to its price. Yields can be calculated for individual properties as well as for portfolios of properties.

There are a number of different ways to calculate rental yields. The most common method is to simply take the annual rent of a property and divide it by the purchase price. This will give you the "gross rental yield", which does not take into account any expenses associated with owning and operating the property.

To calculate the "net rental yield", you will need to subtract all expenses from the annual rent. This includes things like regular repairs and maintenance costs, property management fees, insurance etc. The net rental yield will be lower than the gross rental yield, but it is a more accurate measure of the true return on your investment.

Investors often use rental yields as a way to compare different investment properties. However, it is important to remember that yields can vary greatly depending on the type of property, its location, and the current market conditions. Therefore, it is important to do your own research and not rely solely on rental yield when making investment decisions.

 

Example rental yield calculation

For example, if a property is purchased for $300,000 and the yearly rent is $24,000, the Gross Rental Yield would be 8% = ($24,000 / $300,000) x 100.

However, the Gross Rental Yield does not take into account the expenses associated with being a landlord. These include but are not limited to:

-  Repairs and maintenance cost;

-  Insurance;

-  Body Corporate Fees (if applicable);

-  Land Tax;

-  Water Rates; and

-  Council Rates.

Therefore, to calculate the Net Rental Yield, we must first deduct these expenses from the total yearly rent.

Let's assume the total expenses amount to $6,000. This leaves us with a Net Rental Income of $18,000. Therefore, the Net Rental Yield would be 6% = ($18,000/$300,000) x 100.

As you can see, the net rental yield is much lower than the gross rental yield. This is why it is important to take into account all expenses when calculating the return on your investment.

 

What is a good rental yield?

There is no definitive answer to this question, as it depends on a number of factors. In general, a higher rental yield is better than a lower one. However, you also need to consider things like the type of property, its location, and the current market conditions.

For example, properties in areas with high demand and low supply tend to have lower yields because they are more expensive to purchase (e.g., "blue-chip" eastern seaboard properties like Mosman, Bondi etc.). In contrast, properties in areas with low demand and high supply tend to have higher yields because they are less expensive to purchase (e.g., apartments in Mascot, Liverpool etc.).

It is also important to remember that rental yields can fluctuate over time. For example, a property that has a high yield today may have a lower yield tomorrow if the market conditions change (e.g., changes to immigration policy, new infrastructure being built in the area etc.)

To get a better idea of what is considered a good rental yield, it is helpful to look at average yields for different types of properties in different locations. You can use the Chimni dashboard to analyze yields across almost all suburbs in Australia.

How to increase your rental yield

There are a number of different ways to increase the rental yield on your investment property.

One way is to purchase a property in an area with high demand and low supply. This will typically be a more expensive property, but it will also have a higher rental yield because there are more people competing for the limited number of rental properties.

Another way to increase your rental yield is to purchase a property that is undervalued. This could be a property in an up-and-coming area that is not yet popular with renters. By buying a property before the demand increases, you can get a higher rental yield because you will be able to charge more rent when the demand does increase.

You can also increase your rental yield by making improvements to the property. For example, you could renovate the property to make it more attractive to renters. You could also add features that make the property more desirable, such as a swimming pool or a deck. By making these improvements, you will be able to charge more rent and increase your rental yield.

Finally, you can also increase your rental yield by increasing the rent on your property. This can be done by either increasing the rent on your existing tenants or by attracting new tenants who are willing to pay a higher rent.

Of course, you will need to be careful when increasing the rent, as you don't want to price yourself out of the market. It is important to find a balance between charging a rent that is high enough to generate a good return on your investment and a rent that is low enough to attract tenants.

 

Avoiding common rental yield traps

A rental yield trap is a situation where the rental yield of a property is lower than expected once a property has been acquired, often due to unforeseen circumstances. Here are some common reasons landlords often struggle to achieve the rental yield they expect.

1. Falling into the "newbie" trap

Many first time landlords make the mistake of thinking that they can simply buy any old property, slap on a fresh coat of paint and some new furniture, and start cashing in on high rental yields. Unfortunately, it's not that easy. You need to be aware of the local market, what type of properties are in demand, and what rent you can realistically expect to achieve.

2. Over-capitalizing the property

It's important to remember that you're not trying to create your dream home, you're trying to create a property that will appeal to a wide range of potential tenants. That means that you shouldn't go overboard with expensive improvements and renovations. Stick to simple, cost-effective upgrades that will make the property more attractive to renters.

3. Failing to screen tenants

One of the most important things you can do as a landlord is to screen your tenants carefully. This means running a credit check, talking to references, and doing everything you can to make sure that the people who are renting your property are reliable and trustworthy.

4. Not being prepared for the worst

Even if you do everything right, there's always a chance that something could go wrong. That's why it's important to have a solid plan in place for dealing with things like late rent payments, damage to the property, or problem tenants. By being prepared for the worst, you can avoid some of the common pitfalls that trip up inexperienced landlords.

Conclusion

Rental yields are a important metric for investors to consider when assessing different investment properties. There are a number of different ways to calculate rental yields, and the most common method is to simply take the annual rent of a property and divide it by the purchase price.

Investors often use rental yields as a way to compare different investment properties. However, it is important to remember that yields can vary greatly depending on the type of property, its location, and the current market conditions. Therefore, it is important to do your own research and not rely solely on rental yield when making investment decisions.

The Chimni Dashboard

Chimni is the simplest, fastest and most cost-efficient way to analyse postcodes and suburbs across Australia.

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