Rental yield is simple to calculate and easy to misread. These are eight beliefs we hear often, and what is actually true.
Key takeaways
- Yield is a starting point, not a verdict.
- The yield that matters is net, after costs, and cash flow, after interest.
- High yield and good growth are not mutually exclusive, but both need checking.
Myth 1: The higher the yield, the better the investment
A high yield can reflect a small market, high vacancy, an old property or falling prices. Mining towns are the classic example. Yield rises when prices fall faster than rents, which is good news on paper and bad news for your equity. Treat a yield well above the local average as a question to answer. See when a high yield is a warning sign.
Myth 2: Gross yield is what I will earn
Gross yield ignores vacancy, management, rates, insurance, strata, maintenance and land tax. On a typical property these take 1 to 2 percentage points off. On the house in our gross vs net example, 4.51% gross became 3.18% net.
Myth 3: The yield in the listing is reliable
Listing yields are often calculated on an optimistic rent, sometimes the current lease on a property that has not been re-let in years. Check comparables, ask for the lease, estimate the rent yourself, and run the numbers in the calculator.
Myth 4: A good yield means positive cash flow
Yield ignores your loan. At a 7% interest rate on an 80% loan, a property needs a net yield of about 5.6% just to break even before tax. Most capital city properties are well below that. See how interest rates affect rental yield. All five properties in our worked examples need a weekly top-up.
Myth 5: High-yield areas never grow
Yield and growth often pull in opposite directions, but not always. Suburbs with above-average yields, low vacancy, limited new supply and growing population can deliver both. See rental yield vs capital growth.
Myth 6: Units always beat houses on yield
On gross yield, units usually do win. On net yield, strata levies can shrink or erase the lead. In our units vs houses comparison, a 1.33 point gross advantage fell to 0.48 points net.
Myth 7: The national average tells me what to expect
The national figure blends very different markets. Capital city yields range from the low 3s in Sydney to above 6% in Darwin. Compare a property with its own city and property type, not Australia as a whole.
Myth 8: Yield is fixed once I buy
The price is fixed, but the rent and costs are not. Setting the right rent, reducing vacancy and cutting holding costs all lift your yield. Here are 12 ways to increase rental yield.
The takeaway
Use gross yield to shortlist, net yield to compare, and cash flow to decide whether you can hold. Then weigh growth drivers. For definitions of every term, see the glossary.
Run your own numbers
Enter the price, rent and costs to get gross yield, net yield and weekly cash flow, compared with your capital city.
Frequently asked questions
Is a high rental yield a red flag?
Not always, but a yield well above the local average should be explained. Check vacancy, the local economy, the property’s condition and whether prices are falling.
What net yield do I need for positive cash flow?
Roughly your interest rate multiplied by your loan to value ratio. At 7% interest on an 80% loan, you need a net yield of about 5.6% before tax.
Why do agents quote gross yield?
It is simple, widely published and always higher than net yield. Always work out the net figure yourself.
See what this property would yield
Enter the price, rent and costs to get gross yield, net yield and weekly cash flow.
General information only. This calculator and content do not consider your personal circumstances and are not financial, tax or legal advice. Speak to a licensed professional before making investment decisions.
