What is a Good Rental Yield in Australia?
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Rental yield is one of the best metrics you can use to predict profitability on an investment property. By helping you better understand your annual portfolio returns, rental yield allows you to make more informed investment decisions.
But to make those decisions, you also need to know what constitutes a healthy rental yield. Is there a magic number that you should be shooting for when eyeing up a new property investment?
The answer to this question is very context-dependent, and will likely change depending on your financial goals. Below, we explore rental yields across different parts of Australia, and explain what kind of rental yield figure you should aim for on your next property investment.
What is Rental Yield?
Rental yield is the annual rental income you make on a property in proportion to its value. It’s always expressed as a percentage and helps predict likely annual returns on a buy-to-let property.
There are two types of rental yield:
- Gross rental yield
- Net rental yield
Gross Rental Yield
Gross rental yield shows you what you earn on a rental property before any expenses are deducted. Expenses include things like maintenance costs, strata levies, council rates and property management fees, as well as one-off payments such as stamp duty and any legal fees.
These costs quickly add up, but gross rental yield doesn’t take them into account, leaving you with only a limited view of your returns. You can work out the gross rental yield of a property using the following equation:
Gross rental yield = Annual rental income property value 100
Net Rental Yield
Net rental yield calculates your annual income on a property after expenses have been deducted. This metric gives a clear picture of your cash flow, and is the preferred method for forecasting profitability on an investment property.
You can find the net rental yield of a property using the equation below:
Net rental yield = Net annual income property value 100
We’ve explained how to calculate both the gross rental yield and net rental yield of a property in greater detail in a separate blog post, which you can find here.
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What is a Good Rental Yield in Australia?
Most financial advisers say the 5-8% range generally represents a good rental yield in Australia, but the truth is there’s no industry standard for measuring an effective rental yield. Generally, the higher the rental yield, the greater the returns.
However, this isn’t always true; low rental yield potential may simply mean the property is overvalued, and high rental yield potential could point to undervaluation.
Still, though, you should aim for high net rental yields. These produce healthy cash flows where expenses are easily covered by rental income and money is left over each month to bank. High cash flow also offers serviceability, leaving you less vulnerable to market fluctuations.
What Rental Yield Should I Aim For in Australia?
As we’ve alluded to, putting forward precise figures for recommended rental yield is a tricky business. The Commonwealth Bank considers a good rental yield to be 5.5% or above. Some experts advise investors to aim for rental yields of at least 7.5%.
Your rental yield expectations will depend ultimately on where you plan to buy your investment property. There’s a considerable divide between what represents a good rental yield in Australia’s cities and its regional areas.
While rental yields of 3-5% are pretty standard in metropolitan areas, especially in state capitals, you can often find rental yields of 10% or above in regional towns. But that doesn’t necessarily mean you should be discounting cities from your property hunt.
Rental Yield vs. Growth Capital
Rental yield isn’t the only factor you should be considering when weighing up an investment property.Another key variable is the value of that property over time, otherwise known as its capital growth.
For instance, if your property appreciates in value by 20% by the time you sell, it could prove a more profitable investment than a property with a strong rental yield that depreciates or even stays the same in value.
Herein lies a key dilemma for residential investors: to prioritise rental yield or growth capital. It’s difficult to find a property with both—but not impossible. In many cases, you’ll have to pick between the two. Choosing which one may help narrow down your investment options.
If you’re seeking long-term capital growth with a buy-and-hold strategy, you should consider properties with low net rental yields in the big cities, where house prices are likely to rise.
Investors looking for short to medium-term returns will be better served by properties with high rental yields, which are more likely to be found in regional areas.
Where are the Best Places for Rental Yield in Australia?
Australia’s housing market is changing constantly, which makes it difficult to pin down specific areas that yield strong and consistent returns. However, historical data can be used to evaluate the past performance of different regions and predict the best places for rental yield in the future.
Given the wide gap in rental yield potential between cities and regional areas, we’ve reviewed each of these geographical groupings separately. Below, you can find the current best cities and regional areas for gross rental yield in Australia based on recent data.
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The Best Cities for Rental Yield in Australia
CoreLogic’s 2021 Q1 Rental Review shows that Darwin is currently the highest yielding capital city for property investors, with an average gross rental yield of 6.21% for houses. Sydney sits rock bottom, yielding an average of 2.74%.
The full ranking of Australia’s capital cities is as follows:
- Darwin, NT: 6.21%
- Hobart, TAS: 4.50%
- Canberra, ACT: 4.43%
- Perth, WA: 4.40%
- Adelaide, SA: 4.31%
- Brisbane, QLD: 4.28%
- Melbourne, VIC: 2.92%
- Sydney, NSW: 2.74%
It should be noted that the figures above are subject to market changes and represent gross rather than net rental yield. However, they are a useful starting point for prospective investors seeking to better understand the big picture of Australia’s rental market.
The Best Regional Areas for Rental Yield in Australia
Queensland, Western Australia, and Southern Australia have the greatest number of towns that rank among the 100 best regional suburbs for rental yields in Australia.
Below, we’ve included the top 10 regional areas in Australia for gross rental yield for houses, again courtesy of CoreLogic data from 2021 Q1. As you can see, it’s dominated by towns in Queensland and Western Australia:
- Merredin, WA: 13.83%
- Newman, WA: 13.41%
- Mount Morgan, QLD: 12.48%
- Dysart, QLD: 11.65%
- Blackwater, QLD: 11.46%
- South Hedland, WA: 11.46%
- Derby, WA: 11.33%
- Moura, QLD: 11.08%
- Cloncurry, QLD: 10.92%
- Boulder, WA: 10.89%
While these towns offer impressive rental yields, capital growth is basically non-existent.
Final Thoughts
The answer to what constitutes a good rental yield in Australia depends on your investment strategy.
If you’re looking for long-term capital growth on a property, you’ll likely be drawn to up-and-coming urban areas, where a rental yield of 4.5% or above represents a good return.
If your main focus is maximising rental income, you should consider regional towns, where you can land a rental yield of 9% or higher.
Make sure to use rental yield alongside other ROI metrics to build a more rounded perspective of potential investments and attain your financial goals.
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