How to Calculate the Rental Yield for Your Investment Property
If you’ve found this article, you are probably thinking about investing in rental property. You may have also heard the term ‘rental yield’, and wondered exactly what it is, why it matters, and how to calculate it!
We hope this brief rundown will help demystify the concept.
NOTE: This is general information, NOT investment advice.
What Is Rental Yield?
There are two types of rental yield:
- Gross
- Net
1. Gross rental yield
This is the annual income generated by a property, expressed as a percentage of the property’s purchase price or market value.
2. Net rental yield
This is the annual income generated by a property, less operating costs, expressed as a percentage of property price/value.
For a real-world example, please click the following link: How Do I Calculate Rental Yield?.
Why Do Investors Care About Rental Yield?
Gross rental yield is a quick way to estimate the income potential of any property an investor is considering buying.
It is based on predictions so it cannot be relied on absolutely, but if gross yield seems likely to be well below average, this may rule a property out.
Net rental yield is used to estimate the return on investment (ROI) or profit a property is likely to deliver.
Investors calculate net yield to estimate:
- whether rental income is likely to cover operating costs
- if borrowing, whether rent may also cover loan repayments
- which of several properties is likely to be most profitable
- what rent/sale price will deliver their investment goals
- how a property investment compares to other investment options.
What Data is Needed for a Rental Yield Calculation?
For gross rental yield calculation, you need:
- property purchase price
- projected annual rent
Rents must be realistic for this calculation to be worthwhile. Expect a margin of error as the rental market can change.
When projecting future rent, consider current rent for properties already rented. Check reputable industry sources online (e.g. reiwa.com) and ask an experienced property manager’s opinion to assess future potential.
For net rental yield calculation, you need:
- purchase price
- projected rent
- estimated operating costs, including:
- maintenance/repairs
- insurance
- council rates
- strata levies
- property management costs.
Some people also include depreciation.
Loan interest is not included, as not everyone needs to borrow. Interest doesn’t affect the intrinsic profitability of the investment.
You may choose to factor these in.
What Variables Affect Rental Yield?
Yield calculations are helpful, but not exact, as variables impact rents and outgoings. For example,
- the economy
- population growth
- unemployment levels.
Location, property type, and property age are also factors.
Yields vary by locality where affordable areas often have higher yields.
New properties initially have more depreciation opportunities while older properties often need more maintenance.
Strata properties may have strong yields but we recommend always factoring in the strata fees.
Look for current industry data to guide you.
How Do I Calculate Rental Yield?
For gross rental yield, the calculation is simple:
Estimated annual rent ÷ property price/value x 100
For net rental yield, the calculation is:
Estimated annual rent – estimated operating costs = Net rent
Net rent ÷ property price/value x 100
Use both figures for the best result.
Example Gross and Net Rental Yield Calculations
The example below shows net yield giving a truer indication of an investment property’s performance, as outgoings vary considerably.
| Property | Gross Annual Rent | Property
Price |
Gross Yield | Annual Operating Expenses | Net Rent After Expenses | Net Yield |
| Glendalough townhouse
2 BR 1 Bath
|
$25,480 | $335,000 | 7.6% | Property Management Fees $2100
Council Rates $1,423.48 Water Rates $1,004.29 Strata Levies including reserve fund $2864 Total $7457.77 |
$18,022.23 | 5.3% |
| Gosnells Duplex
2br 1 bath |
$25,480 | $339,000 | 7.5% | Property Management Fees $2100
Council Rates $1,495 Water Rates $828.64 Strata Levies – nil Total $4423.77 |
$21,056.23 | 6.2% |
How Can I Be Sure I’m On the Right Track?
Like any investor. you want your rental property to return a strong yield— doing your homework can improve your odds.
While it’s not an exact science, an experienced local property manager and agent can give you an expert view.
Our property managers at We Love Rentals have a wealth of knowledge to share and can also refer you to other local experts like valuers. You may also find our blog post on buying your first investment property useful.
Why not email us or call (08) 6254 6300 for friendly, professional advice.
Brendan Leahy
I am the licensee of We Love Rentals and provide support to the team whenever needed. I began my real estate career over two decades years ago. While I loved seeing people achieve their dream of a new home for their family, I kept thinking that there had to be a better way of doing real estate – one with respect for the long term benefit of the client and one that focuses on customer satisfaction.
