How to Calculate the Rental Yield Correctly

Rental Yield determines the return on investment from the rental property each year as a percentage of its market value or price. Real estate investors use our Free Rental Yield Online Calculator to identify the most profitable potential properties for investment. The most simple and easy to use tool to calculate Rental Yield. It gives you a quick way to compare returns on different investment properties (or investments). It is perfect for property investors, buyer’s agent, real estate agents, property managers, mortgage brokers, valuers, and even property developers.

There are two types of rental yield: Gross Rental Yield and Net Rental Yield.

1. Gross Rental Yield

This is expressed in a percentage calculated by: The total annual rent from the tenant divided by the property’s total market value, then multiplied by 100. This gives you the total profit on a rental property before expenses.

2. Net Rental Yield

This is also expressed in a percentage calculated by: The total annual rent received from the tenant less the total property expenses, including repairs, maintenance fees, management costs, insurance fees, and other charges. Maybe a bit harder to calculate, but it provides a more accurate result.

What does a high rental yield mean? This means that investors get more cash flow from the property, improving their return on investment. Or, to put it simply, it means a “positive cashflow” for the investor.

Calculating Rental Yield the Right Way

What does a high rental yield mean? This means that investors get more cash flow from the property, improving their return on investment. Or, to put it simply, it means a “positive cashflow” for the investor.

Avoid this by doing simple calculations to get both gross and net rental yields.

Rental Yield Calculator

How to Calculate Gross Rental Yield?

The formula for calculating gross rental yield is:

Annual rental income x 100
Price of the property

If a property generates $1,500 per week in rent and is advertised for sale at $1,000,000, the gross rental yield is as follows:

  1. Multiply $1,500 by 52 (weeks) to get the annual rental income = $78,000.
  2. Divide $78,000 by total market value which is $1,000,000 = 0.078.
  3. Multiply 0.078 by 100 to get the percentage, giving us the gross rental yield of 7.8%.

*Note that the above method doesn’t consider other expenses and costs associated with managing investment property. So, this could lead to inflated numbers that might lead investors to assume the property will be more profitable than it is.

How to Calculate Net Rental Yield?

Net Rental Yield is a better indicator of a property’s probable rental return as it includes all the costs and expenses in managing the property. Therefore, the figure should be more realistic and accurate.

The formula for net rental yield is:

(Annual rental income – annual expenses) x 100
Price of the property

Before calculating the net rental yield, you will have to estimate or determine the property’s annual expenses. The usual property annual expenses include:

  1. Body corporate or strata levies;
  2. Insurance premium costs;
  3. Interest from the loan;
  4. Council and water rates;
  5. Maintenance costs;
  6. Property management fees;
  7. Vacancy costs.

The annual expenses can be calculated by adding the said costs, which apply to a property. This means that if a property generates $1,500 per week in rent, has an annual expense of $17,000, and is advertised for sale at $1,000,000; the net rental yield is as follows:

  1. Multiply $1,500 by 52 (weeks) to get the annual rental income= $78,000.
  2. Deduct the annual expense of $17,000 from $78,000 = $61,000
  3. Divide $61,000 by the price of the property which is $1,000,000 = 0.061.
  4. Multiply 0.061 by 100 to get the percentage; thus, the net rental yield = 6.1%.

***Based on the above results, there is quite a significant difference between both calculation methods. While the gross rental yield is 7.8%, the net rental yield of 6.1% shows a more accurate figure allowing investors to make more informed investment decisions.

Gross Rental Yield vs Net Rental Yield

Gross rental yield does not reflect the amount of profit (or loss, in case) that the property generates, but it affords the investor the gross rental income versus the property’s price. This figure excludes all operating expenses. It is a sound method of shortlisting potential investments before a detailed evaluation of each property, saving you time and effort in the initial selection phase.

Alternatively, the net rental yield is more important for property investors since it paints a real scenario of a property’s probable rental return. In addition, it takes into account everything it incurs as costs to keep the property functional. Note that this calculation for net rental yield includes only expenses pertinent to the property. Other related costs like mortgage interest charges, taxes, and additional fees on the property owner’s financial condition are excluded.

What is a Low Rental Yield? Is it bad?

Although properties with high net rental yields are ideal, this doesn’t mean that properties with low net rental yields are bad investments. On the contrary, investors looking for long-term capital growth using a ‘buy-and-hold strategy’ may benefit from properties with low net rental yields.

For example, if one holds $3 million in assets, a yearly rise of 7 percent in its value will translate into $210,000 in the 1st year and compounds as the prices in the property cycle continue to run its course

However, for this investment strategy to work, investors will have to establish a steady cash flow stream to sustain their portfolio especially during periods of low cash flow.

What is Considered a Good Rental Yield

There is no industry-standard rental yield percentage that is considered ‘good.’ But the general rule of thumb is the higher the rental yield, the better it is for investors looking to improve their cash flow. This means an increased cash flow where total income can pay for all the expenses gives one serviceability. Likewise, it provides you time in the market since you’re not under complete control of market fluctuations and high-interest rates.

However, a high rental yield doesn’t always translate to higher returns. For example, a remarkably higher rental yield (between 8-10%) could mean that the property is undervalued or below market value. In contrast, a significantly lower rental yield (between 2-4%) can indicate that it is overvalued.

The advisory of Commonwealth Bank of Australia aims for 5.5% or higher rental yields, representing a relatively stable rental income and a more financially sustainable investment.

How Does Rental Yield Affect Your Investment Property?

Understanding how property yield works will be helpful when it is time to review the rent on an investment property. Gross Rental Yield is the easiest, fastest way to get a ballpark of the monthly rent for the property. It can also be helpful when evaluating a property’s investment potential compared to other properties in the same area. An investor can set an acceptable minimum ‘Gross Rental Yield’ in his evaluation and do the calculations to see if a property is within his requirements.

Although it is tempting to focus on the gross rental yields because it is easier to calculate, it can be misleading when comparing different investment properties. For a realistic estimate of your property investment yields, you should focus on its Net Rental Yield.

Is it Possible to Have an Excellent Rental Yield and Good Capital Growth?

YES, it is definitely possible to find a suburb with an excellent rental yield and good capital growth.

But this can be uncommon as most areas are generally geared for one (or the other). Primarily, an investor will have to pick between the two options as an investment property.

Investing in a property with solid capital growth seems the obvious option. However, rental yields tend to be almost always negatively geared for properties. What does this mean? It would denote that expenses typically exceed the rental earnings.

Conversely, properties with higher rental yields are usually positively geared, meaning the rent exceeds all the costs. As a result, when it’s time to sell, the capital gains are likely to be less than that of properties with solid capital growth.

What is the PRIORITY now?

Do your research and due diligence when planning to invest in property. Combining the different real estate data points will provide the best insights for data-driven property investment decisions.

In general terms, the HIGHER the rental yield – the better the investment is since the property will be generating more revenue and income on both the gross and net basis.

While Gross Rental Yield can help you quickly narrow down your list of potential properties to buy, Net Rental Yield can provide you a more realistic estimate of your property’s financials.

With these calculations in mind, having a good understanding of real estate data is key to making more informed investment decisions. It’s a foolproof way to ultimately realize your financial objectives in property investment and becoming successful in real estate.

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