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Maintenance, insurance, taxes, etc.
Expected percentage of time unoccupied
Rental yield is the annual rental income expressed as a percentage of the property's value. It's a key metric for evaluating real estate investments, helping you compare different properties and assess potential returns. A higher yield indicates better investment performance.
Formula: Rental Yield = (Annual Rent ÷ Property Price) × 100%
Rental Yield is a measurement that investors use to understand an income-generating asset's performance over the course of a year. It measures how much cash your investment produces as a percentage of the asset's value. In real estate then it is the rental income as a percentage of the property's value.
When thinking about rental yield there are two terms you need to be familiar with: gross yield and net yield.
Gross yield is the return on your investment before expenses and vacancies are taken into account. Gross yield also does not take interest rates into account. Gross rental yield is a common metric to look at when analysing returns as it is simple to calculate letting you easily compare properties.
You take the 'Annual rental income' and divide by the 'Property value'. Then multiply this number by 100 to get a percentage value.
EXAMPLE:
Property value $600,000.
Expected rent $3,000 a month.
$3,000 x 12 = $36,000
(annual rental income)
($36,000 /$600,000) x 100 =
6% gross rental yield
Net yield takes into account any expenses or other outgoings such as maintenance costs, mortgage payments and insurance. Net yield is sometimes referred to as a rate of return. Because it takes into account these expenses it gives a more accurate picture of an investment's cash flow than gross yield.
Take the 'Annual rental income' and subtract the 'Annual expenses'. Then divide this number by the 'Property value' and then multiply by 100 to get a percentage value.
EXAMPLE:
Property value $600,000.
Expected rent $3,000 a month.
Annual expense/loss $6,000
$3,000 x 12 = $36,000
(annual rental income)
(($36,000 - $6,000)
/$600,000) x 100
= 5% net rental yield
A rental asset should have a positive cash flow even after surprise expenses. You will want to calculate how quickly you can make a property positive after your initial expenses immediately after purchasing the property (e.g. renovations).
This should be considered on a yearly basis as well as an overall basis to give yourself the best possible understanding of your property's cash flow.
This is how long it will it take to breakeven on your investment. We work this out in our calculator from your cash flow, vacancy rate, and property purchase price. However, you should also consider mortgage interest rates when calculating this.
There's no universal answer to this question. Determining the strength of an investment depends on numerous factors as well as your overall investment goals and intentions.
In an ideal world you'd aim for 7%-8%, however, it is definitely worth noting, that this may not be realistic in certain locations, or necessary if you've a longer term investment strategy that is more reliant on capital gains.
Other factors that should be taken into consideration, include but are not limited to:
Is the property in a desirable location, near amenities, near public transport? etc.
What capital gains can be expected? Is the purchase price good? Have you done work on the property?
Are there any local developments that might damage the property of the value, e.g. plans to further develop a nearby airport? Is the state introducing tighter rental regulations?
How long do you plan on holding the property?
What is your overall investment strategy and how does this property play into your long term financial goals?
Check out our detailed guide on how to calculate rental yield with step-by-step examples.
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