How to Calculate Rental Yield in Australia
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Rental yield is the single most important metric when it comes to property investment. Without it, investors would be going in blind on the market and crossing their fingers for a favourable outcome.
Thankfully, your property investment doesn’t have to be a leap of faith; with rental yield, it’s easy to work out the average returns your investment will make per year. This metric will help you spot the golden egg among the dud investments and truly get the most out of your portfolio.
The process for calculating rental yield is actually pretty simple. Continue reading below to find out how to calculate rental yield, as well as what constitutes a high rental yield in Australia.
What is Rental Yield?
In a nutshell, rental yield is the return you make or expect to make, on a property you own or are planning on purchasing. It measures the gap between the overall costs and income on the property to calculate the value of rent after all expenses have been deducted.
The figure is always expressed as a percentage, representing the proportion of the property’s value that you make back in a typical year. Gross rental yield depicts what you earn before any other expenses on the property are deducted; net rental yield shows your final profits.
Why is Rental Yield Important?
Rental yield is an essential tool for any property investor that wants to maximise their profits. It has three main purposes:
- Calculate future income. Rental yield helps property investors forecast portfolio income over a given period, allowing them to budget accordingly;
- Review rent. Rental yield insights help property investors adjust rent prices in line with expenses to get the most of their portfolios; and
- Evaluate investment strategy. Rental yield shows whether a property is likely to produce a strong return on investment or not. These insights are crucial to making successful long-term investment decisions.
How Do I Calculate Rental Yield?
You can work out a property’s rental yield in a few steps with some basic maths. Let’s start with calculating gross rental yield.
How to Calculate Gross Rental Yield
Remember, gross rental yield is the income on a property before any expenses are deducted. This metric can be calculated in three simple steps:
- Work out your annual rental income by multiplying the weekly rent by 52;
- Divide the annual rent by the property value; and
- Multiply this number by 100.
Here’s an example. Let’s say you receive $600 weekly rent from your tenants on a property that you purchased for $650,000. Over the course of the year, rental income adds up to $31,200.
To work out gross yield, divide 31,200 by 650,000, and then multiply this number by 100. This comes out as 4.8, so the gross rental yield is 4.8%.
We can summarise this process with the following equation:
Gross rental yield = Annual rental income property value 100
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How to Calculate Net Rental Yield
Net rental yield takes into account all expenses associated with a property and deducts them to calculate net profit, or cash flow. This is the best way to calculate return on investment for a specific property.
Before we begin, you need to add up annual property expenses. These include:
- Strata levies
- Council rates
- Maintenance costs, such as repairs and safety checks
- Property management fees
- Insurance
- Interest
There are also one-off purchase costs, such as stamp duty and legal fees, that you’ll need to factor into your budgeting.
With all property-related expenses at hand, you can work out your net rental yield by following the steps below:
- Add up your annual property expenses;
- Work out your annual rental income by multiplying the weekly rent by 52;
- Subtract annual property expenses from the annual rental income;
- Divide this number by the property value; and
- Multiply the result by 100.
Let’s consider another example. One year after buying an investment property for $700,000, you work out that annual expenses are $12,000. In the first year, weekly rent of $750 nets annual earnings of $39,000.
To work out net yield, subtract 12,000 from 39,000 to get 27,000. Divide this number by 700,000, and then multiply the result by 100. This leaves you with 3.86, so your net rental yield is 3.86%.
We can summarise this process with the following equation:
Net rental yield = Net annual income property value 100
Rental Yield Calculators
If you’re still struggling to work out the rental yield of your property, we recommend using one of the many rental yield calculator tools available online. Here’s one on calculatestuff.com.
How Do I Calculate the Payback Period?
Rental yield can also be used to work out other useful property investment ROI metrics, such as the payback period. Simply put, this is the time taken in years to recoup the money you initially invested in the property.
You can calculate the payback period on an investment property with some of the numbers you already chalked up when working out the rental yield. Here’s the equation:
Payback period = property purchase price net annual income
What’s a Good Rental Yield in Australia?
It’s difficult to say what constitutes a good rental yield in Australia; the answer ultimately depends on your long-term investment goals and where you plan to buy your property.
The “2% rule” in real estate states that property investors should achieve a 2% net rental yield on their assets as a bare minimum. However, most investors shoot for returns of 5-8%—this range reflects a strong and stable return on investment.
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Where are the Best Places for Strong Rental Yield in Australia?
Due to the ever-changing nature of the Australian property market, it’s difficult to pin down specific areas that yield consistent returns.
Generally, regional areas of Australia bring higher rental yields—up to 13% in some cases. In metropolitan areas, especially state capitals, you’re likely to find rental yields ranging from 3-5%.
This doesn’t necessarily mean you should buy property in regional Australia. For instance, a lower rental yield on an inner-city apartment could be offset by the property’s value rising at a fast pace.
Final Thoughts
As we’ve learned, net rental yield is simply the return you make on investment property, in percentage form, after expenses have been deducted. It’s easy to work out using the equation below:
Net rental yield = Net annual income property value 100
Before making a decision on a property, it’s imperative you calculate its potential rental yield, using estimations on expenses and rental income if you have to. Even during ownership, rental yield can help you review your financial strategy and refine your investment portfolio.
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