When investing in a property, you often first consider the return on its investment. This is known as rental yield in real estate investment and is crucial when determining which properties and suburbs are worth investing in.
Read on to discover what rental yield is, how to leverage it, what makes a good rental yield percentage, and other relevant factors.
Property investment: Rental yield in a nutshell
Rental yield is the difference (as a percentage) between your rental income and the overall cost of investing in the property. Essentially, the higher the rental yield percentage, the greater your cash flow and the more return you can get from your investment.
Furthermore, rental yield comes in two categories: gross rental yield and net rental yield. Both rental yields are computed differently and may produce substantially different figures.
Gross Rental Yield
The gross rental yield looks at how much you earn from rentals over a year against the property’s current market value. While your property’s gross rental yield is helpful when determining its investment potential, it doesn’t give you an accurate and realistic figure representing your outgoings.
Gross Rental Yield Example
Calculating your gross rental yield is easy. Simply take your rent payment (weekly or monthly) and work out its annual income equivalent. After that, divide it by the purchase cost and multiply the quotient by 100 to get the gross rental yield percentage.
Here’s a quick example:
- Adam bought an investment property in Homebush for $600,000
- He rents it out to a university student at $450 per week
- Hence, the gross rental yield for his Homebush investment property is the annual rental income (for about 52 weeks) divided by the purchase price.
($450 x 52 weeks) / $600,000 x 100% = 3.9%
- Hence, the gross rental yield is at 3.9%
Net Rental Yield
On the other hand, net rental yield factors in the ongoing expenses to maintain your property. Consequently, it is a more realistic representation of your property’s income and cash flow.
Here are some factors to account for when calculating net rental yield:
- Property insurance
- Strata fees (for applicable property types)
- Vacancy costs
- Repair & maintenance costs
- Legal fees
- Building inspection fees
- Agent fees
Net Rental Yield Example
To determine the net rental yield, take the property’s regular rental income (weekly/monthly) and work that to an annual income. Then, deduct all anticipated expenses for the same 1-year period. Finally, divide that by the property purchase price and multiply the quotient by 100 to get a percentage yield.
- Back to Adam’s rental property
- Work out his weekly rent price of $450/week, which is $23,400/year.
- His estimate for the total annual expenses is roughly $5,000/year.
- His net rental yield should be:
($23,400 – $5,000) / $600,000 = 0.0306 X 100 = 3.06%
- Adam’s net rental yield is approximately $3.06%.
Simply put, whether you’re calculating your property’s gross or net rental yield, both help put your investment into perspective and determine whether the ongoing return yield works with your investment goals.
Tracking your rental yield also helps you make insightful and comprehensive annual reviews of your investment property.
What is a ‘good’ rental yield?
While there’s no clear-cut answer on what is a good rental yield, it’s evident that the higher it is, the more income you’ll get, offering a solid cash flow.
However, a relatively high rental yield often indicates an undervalued property. Think of it this way:
- Suppose your investment property produces a high rental yield of roughly 8-10%. In that case, the property may be undervalued, meaning it sold at a lower price, hence the high rental yield percentage.
- On the other hand, a property with a low rental yield (about 2-4%) could mean it’s overvalued and was sold at a very high price, hence struggling with getting a good rental yield.
As of 2023, CoreLogic data reveals that Western Australia’s capital, Perth, had the highest gross rental yield at 4.9% despite having one of the lowest investment activities in the same period.
Finding the sweet spot of rental yield boils down to a well-integrated investment strategy accounting for location, rental price, and other relevant factors contributing to a steady cash flow or growth potential.
A relatively lower rental yield than neighbouring suburbs may not give you a strong profit or cash flow. Still, it may offer superior capital growth if it’s located in a popular suburb.
Learn more about determining your suburb’s rental yield and growth potential by calling us at 1300 030 388 today.
Which suburb has the best rental yield?
As of November 2023, the top-performing suburbs in the Sydney and regional NSW are:
- Auburn – 6.0%
- Warwick Farm – 5.8%
- Mascot and Rosehill – both at 5.7%
- Mays Hill – 5.6%
- South Windsor – 4.2%
- Lawson – 4.1%
- Hazelbrook & Airds – Both at 4.0%
- Jordan Springs – 3.9%
Those are just a few suburbs listed with decent rental yields in NSW. Talk to our senior mortgage brokers at 1300 030 388 to learn about expected rental income in your chosen suburbs and make better-informed investment decisions.
Consider these factors when evaluating rental yield
There are a few essential things to be mindful of if you’re considering investing in a property. To ensure that your rental income covers all costs and is sustainable in the long run, we highly recommend checking its net rental yield (and not gross rental yield) to estimate your potential returns accurately and whether they’re favourable.
An expensive property doesn’t necessarily translate to a high rental return. Your property may have outgoing expenses high enough that it exceeds your rental income. This phenomenon is known as negative gearing and can impact your long-term investment goals if factored into your decisions.
Many people take advantage of negative gearing for a few reasons. One is that any losses incurred in a given financial year can be used to offset the income you earn. Thus, reducing your taxable income and in turn reducing your tax bill.
In a nutshell, negative gearing is helpful for investors who don’t rely on additional cash flow and are more focused on capital growth.
If you need to supplement your monthly income with rental income from your investment, we highly recommend looking at suburbs with decent rental yields and positive gearing.
Planning to invest?
With Australia’s real estate market slowly accelerating, it may be a ripe time to scout for attractive investments.
But the investment journey doesn’t end there. A significant portion of investing includes getting the funds and the right investment loan to back you up. That’s where we come in.
Finding investment property financing that works for you means comparing several options from multiple banks. We have a panel of 40+ banks and non-bank lenders (including major banks), and we’ll take you through each option so you get the best deals.