What is rental yield?

What is a rental yield?

Your rental yield is the amount of money you've made on an investment property. It's the amount left over after you take out your property expenses from the rental income.

By understanding the rental yield on a particular investment property, you can calculate how long it will take to reach your investment goals. It will also tell you whether you're better off searching for a property in a different suburb where the rental yield may be higher. A higher rental yield generally means a greater cash flow.

Rental yields are sometimes referred to as "hard" or "soft". A hard rental yield is one that is falling, usually as a result of property prices increasing, while a soft rental yield is one that is increasing.

Of course, not every investor is solely concerned with rental income. Growth in the value of the property itself over time (your capital gain) is very important too. Yield does not measure future price growth.

How to work out rental yield

There are a few ways to calculate rental yield:

Gross rental yield

Gross rental yield is calculated by taking the total annual rent charged and dividing it by the property value. Multiply this number by 100 to give you the gross rental yield as a percentage.

The formula is: (annual rent divided by purchase price times 100 = gross yield)

Here's a simple example:

• Investment property purchase price: $700,000
• Weekly rent charged: $450
• Annual rent: $23,400
• 23,400 divided by 700,000 times 100 = 3.34
• Gross yield = 3.34%

Net rental yield

Net rental yield includes the above calculation plus all costs incurred. This could include insurance, rates, property management and repairs. To calculate the net rental yield, you take the total annual rent charged minus all incurred expenses. This new number is divided by the property value and multiplied by 100 to give you the net rental yield as a percentage.

Return or a total rental yield

Return or a total rental yield refers to the total gain or loss made on an investment property over a specific period. Unlike gross or net rental yield, a return includes capital gains and can be either a dollar number or a percentage. The return is wholly focused on past performance and does not take into account potential future earnings.

Although gross rental yield gives you an overall figure, it's the net rental yield that helps you see your true profit for the year. Ongoing costs or costs that fluctuate greatly can also lead to your rental yield changing year on year.

How do I research investment rental returns?

Start by looking at the average rents in a particular suburb you're interested in as well as the surrounding suburbs. Look at the rental yields for comparable properties in comparable suburbs or ask estate agents.

Be sure to ask whether a yield advertised is gross or net as well as the period of time the yield has been calculated on. A gross yield will appear much higher, but be wary of the net yield if there are significant costs involved with the property.

You can also work out a rough yield estimate yourself by:

1. Looking at recent property sales in an area and determining a reasonable average price for the type of property you're looking to buy.
2. Checking current rent charged on similar properties in the same area.
3. Combining these figures to get a rough yield estimate.

This is quite simple, but you need to make sure you are comparing like for like. A 3-bedroom unit will probably have a lower value than a 3-bedroom house. And rents may differ too.

Expert insight: Don't focus only on yield

"Smart investors balance cash flow and capital growth.

You need to look at: what you are trying to achieve, over what time frame, and what your servicing capacity is with the lenders for a mortgage.

Focusing only on yield could mean buying in stagnant areas with little long-term upside.

Focusing only on capital growth means you could be killing your borrowing capacity so even if the property does grow you are unable to leverage the equity to buy another investment property.

Getting the balance between these two based on your personal circumstances is crucial."

Steve Palise

Investor, buyer's agent and founder of Palise Property

What is considered a good rental yield in Australia?

Rental yields vary considerably and it's difficult to say what you would consider to be a high rental yield. Generally speaking, most investors look for a rental yield of 5.5% or above.

But this will be different depending on factors like whether the property is in a metro region or regional area and whether it's a house or a unit.

The best advice would be to research the market and suburbs to determine an average or above average rental yield. A high average rental yield could mean your property is undervalued within the market.

What other factors should you consider when looking at an investment?

Ultimately, there are a number of factors to consider besides rental yield to determine whether a particular investment property is a money maker. Start by considering the total return on a property against the potential risks.

Look at drivers of capital growth for a potential property such as the location, population and economy of the local area. An area that is growing or has new infrastructure planned is much less likely to have rental vacancies, which can severely impact your investment profits.

Rental yields are merely one part of a bigger picture. Zoom out and focus on the overall factors before making an investment decision, and enlist the advice of a professional who can advise you on the current market conditions.

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Frequently asked questions

• Does rental yield include stamp duty?

  No, rental yield is usually calculated based on annual rental income and property value. It does not include other purchasing costs like stamp duty, maintenance or management fees.

• What is the best yield for rental property?

  The best rental yields are generally considered those that are above 6%. Properties with yields between 6% and 8% are considering high yield. Lower yields are more common in high-demand metro areas.

• What is the rental yield in Australia capital city?

  Rental yields in Australia's capital cities vary. Sydney and Melbourne have yields around 3-4%, while smaller capitals like Darwin or Hobart may offer yields above 5%.

• What is a good yield for commercial property?

  A good yield for commercial properties is typically higher than residential, around 5% to 10%, depending on the location and type of property.

Written by

Rebecca Pike

Editor, Money

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Rebecca Pike is Finder’s money editor, with over 7 years of experience in mortgages and personal finance. A frequent TV and radio commentator, she frequently appears on Sunrise and 7News, Today and 9News, as well as Sky News, Channel 10 and across radio and print. Rebecca previously served as Editor of Mortgage Professional Australia. She has a Master’s degree in Journalism as well as ASIC-recognised certifications in Tier 1 Generic Knowledge and Tier 2 General Advice Deposit Products, which comply with ASIC guidelines. See full bio

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Richard Whitten is Finder’s Senior Money Editor, with over eight years of experience in home loans, property, credit cards and personal finance. His insights appear in top media outlets like Yahoo Finance, Money Magazine, and the Herald Sun, and he frequently offers expert commentary on television and radio, helping Australians navigate mortgages and property ownership. Richard started his career in education and textbook publishing in South Korea. He holds multiple industry certifications, including a Certificate IV in Mortgage Broking (RG 206) and Tier 1 and Tier 2 certifications (RG 146), as well as a Bachelor of Education from the University of Sydney and a Graduate Certificate in Communications from Deakin University. See full bio

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