If you’re looking for investment property, consider rental yield as one tool in your kit, albeit an important tool. It is a measure of how much cash an income generating property asset produces each year as a percentage of that asset’s value. Put simply, it is the annual rental income divided by the property’s value, and expressed as a percentage.
The term “rental yield” is commonly used in place of the more correct term “gross yield”. Gross yield means that the rental yield figure does not take into account such items as insurance, maintenance and repairs, property management fees, depreciation, and so on. These items are of course relatively difficult to calculate across a broad suite of properties, and so are far less often referenced when calculating yield figures.
How to Calculate Rental Yield?
To work out a rental yield, the weekly rent X 52 weeks, is divided by the purchase price. A quick way to work out a yield in your head is that 5.2% yield is approximately $1 of rent per $1000 of price. Example 5.2% rental yield on a property at $450,000 purchase price would be $450 a week rent. ($450 X 52 = $23,400 divided by $450,000 = 5.2%).
Why Is Rental Yield Important To Consider When Investing?
Renters are more nimble than property purchasers. They are operating on a more short-term basis e.g. a 12 month lease rather than a 20 year mortgage. For a renter, it is a lot easier to move than if you are an owner-occupier.
Renters will be the first to move when a suburb begins to increase in its attractiveness. But since renters are not purchasing, the increased rental demand (driving rental asking prices higher) is not immediately reflected by higher property prices. This results in higher yield.
In time, investors and owner-occupiers will of course also notice the attractiveness of the location, but they are slower to move than the rental market. As property prices increase over time through increased demand to purchase, capital growth mounts for those who purchased earlier. But the lead indicator was the rental yield.
What is a Good Rental Yield?
There is no definite percentage that is considered as a ‘good rental yield’, but if you pay a high price for purchasing and holding a property, you must aim for a rental return high enough to offset the costs that you have to shoulder.
For investors looking to rental yield potential as a deciding factor when purchasing a property, most banks will advise to aim for 5.5 per cent or higher.
For them, if the gross rental yield potential of a property is at four per cent or below, chances are the property is overvalued for investment purposes. On the other hand, if the gross yield is 5.5 per cent or higher, the property could be undervalued or sold below market value.
Should Low Rental Yield be Avoided?
Properties with high net rental yields are ideal for risk-averse investors who want to afford peace of mind as their investment generates good cash flow and ultimately takes care of their loan repayments.
By having positive cash flow, investors can sleep at night knowing that they have a good buffer in case of interest rate fluctuations, vacancy, personal crisis other low-income periods.
However, this is not to say that properties with low net rental yields are automatically bad news.
Investors who seek to chase capital growth and implement a long-term buy-and-hold strategy in a sustainable market may benefit from properties with low net rental yields.
Is Rental Yield Always A Good Indicator of Future Capital Growth?
In general, high yield represents strong interest from renters compared to purchasers. The important consideration is whether rental interest is likely to shift towards buyer interest in time as well. If so, rental yield can be a good lead indicator of capital growth, but should be considered alongside other factors to determine return vs risk.
On the way to choosing an investment property, a high yield is important, but not to be used in isolation when making the decision.
The Holy Grail when it comes to investment property is a high yield dwelling in an area that promises capital growth.
But where is the best place to buy an investment property? What are the best suburbs to invest in? Where can you buy property for below $500,000 with a Rental Yield of 5% and above and with a good Capital Growth? These are the most common questions property investors ask and it involves a lot of time researching to find answers to all of these.
The good news is, we’ve already done those hard work for you. In just a matter of seconds, you’ll be able to identify which suburbs you should be investing at based on amount that your willing to invest using our reports.
By just filtering and sorting, you’ll be able to identify which suburbs
- Have a good demographics of people
- Have a median price that will suit the amount you’re willing to invest, especially the suburbs with a median of $500k and below
- Have More than 8% Annual Capital Growth
- Have More than 6% Rental Yield
- Have Less than 3% Vacancy Rate
It is the most comprehensive downloadable investment property report of all suburbs in Australia – with linked state, suburb, postcode, average annual growth, median property value, median rent, gross rental yield, vacancy rate, population, gross weekly income, median monthly mortgage repayments and more. It’s perfect for property investors, buyer’s agent, real estate agents, property managers, mortgage brokers, valuers, and even property developers.
Once you’ve identified which suburbs are the best for investing a property don’t forget to do your due diligence and check if the numbers stack up using our All-in-One Investment Property Calculator to pick the right property for you.