Plain-English definitions of the terms you will meet when working out rental yield, talking to lenders or reading a property manager’s appraisal. Each term has its own link you can share. To put the numbers to work, use the rental yield calculator.
A
- Annual rent
- Weekly rent multiplied by 52. It is the starting point for both gross and net rental yield.
B
- Body corporate
- The legal entity made up of all owners in a strata scheme, called an owners corporation in some states. It manages common property and charges strata levies.
- Bond
- Money a tenant pays at the start of a lease, held by a state bond authority, to cover unpaid rent or damage at the end of the tenancy. It is not income and does not affect yield.
C
- Cap rate
- Short for capitalisation rate: net operating income divided by property value. Common in commercial property. For residential property it is effectively the same as net rental yield. Read more.
- Capital growth
- The increase in a property’s value over time. Investors weigh it against rental yield, because the two often pull in opposite directions. See rental yield vs capital growth.
- Cash flow
- The money left after rent comes in and all costs, including loan repayments, go out. Positive cash flow means the property pays for itself. Read more.
- Cash-on-cash return
- Annual pre-tax cash flow divided by the cash you actually put in (deposit plus purchase costs). It shows the return on your own money. See property investment metrics.
- Comparables
- Similar nearby properties that recently sold or leased, used to estimate a property’s value or rent.
- Council rates
- An annual charge from the local council, based on the land or property value. A landlord cost included in net yield.
D
- Days on market
- How long properties take to sell or lease in an area. Falling days on market suggests rising demand.
- Depreciation
- A tax deduction for the decline in value of a building and its fittings over time. It improves after-tax returns but is not part of rental yield. Read more.
E
- Equity
- The difference between a property’s value and the loan against it. Investors often use equity from one property as the deposit for the next.
G
- Gross rental yield
- Annual rent divided by the property price, multiplied by 100. Quick for comparing properties, but ignores costs. See gross vs net rental yield.
I
- Interest-only loan
- A loan where repayments cover only interest for a set period, so the balance does not fall. Common for investors because it improves cash flow in the early years.
L
- Land tax
- An annual state tax on land you own, other than your home, above a threshold. Thresholds and rates differ by state and depend on your total land holdings. Read more.
- Landlord insurance
- Insurance covering the building or contents a landlord owns, plus risks such as loss of rent and tenant damage. A running cost in net yield. Read more.
- Leasing fee
- A one-off fee a property manager charges to find a new tenant, often one to two weeks’ rent. Also called a letting fee.
- Lenders mortgage insurance
- Insurance the lender requires, and the borrower pays for, when the deposit is under 20% of the property value. Shortened to LMI.
- Loan to value ratio
- The loan amount as a percentage of the property value. An 80% LVR means a 20% deposit. Shortened to LVR.
M
- Median rent
- The middle weekly rent in an area: half of rents are higher and half are lower. More reliable than an average, which a few expensive rentals can distort.
N
- Negative gearing
- When a property’s costs, including interest, are more than its rent. The loss can usually be deducted against other income. Investors accept it in the hope of capital growth. Read more.
- Net operating income
- Rent collected less running costs, before loan interest and tax. The top half of the net rental yield formula.
- Net rental yield
- Annual rent less vacancy and running costs, divided by the property price, multiplied by 100. Excludes loan interest. See our methodology.
- Neutral gearing
- When rent roughly covers all costs including interest, so the property neither costs nor earns money week to week.
P
- Positive gearing
- When rent is more than all costs including interest, so the property earns income. The surplus is taxable. Read more.
- Principal and interest
- A loan where each repayment covers interest and also reduces the loan balance. Repayments are higher than interest-only.
- Property management fee
- The ongoing fee a property manager charges, usually a percentage of rent collected plus GST. Read more.
R
- Rental appraisal
- A property manager’s written estimate of the rent a property should achieve, based on comparables. Read more.
- Rental yield
- The annual rent a property earns as a percentage of its value. Usually quoted as gross yield unless stated. See what is a good rental yield.
- Return on investment
- Total gain from an investment (income plus growth, less costs) as a percentage of what was invested. Shortened to ROI. Broader than yield.
S
- Serviceability
- A lender’s test of whether you can afford the loan. Lenders typically count only part of rental income to allow for vacancy and costs. Read more.
- Stamp duty
- A state tax on buying property, also called transfer duty. A large upfront cost that affects cash-on-cash return but not published yields.
- Strata levies
- Regular fees paid by owners in a strata scheme to cover building insurance, maintenance, sinking funds and common areas. A major cost for units. Read more.
V
- Vacancy allowance
- The number of weeks a year you expect the property to be empty, deducted from rent in net yield. Two to three weeks is a common starting point.
- Vacancy rate
- The share of rental properties in an area that are empty and available. Rates under 2% are generally considered tight, favouring landlords. Read more.
Y
- Yield on cost
- Net income divided by the total cost to acquire a property, including stamp duty and fees. Lower than net yield because the cost base is larger.
Missing a term? Let us know.