The property investor dream is to secure a high rental yield property, in a location that delivers large capital gains, combined with low management fees, expenses and maintenance costs.
This means that rental yields are not the only consideration when purchasing an investment property, but still arguably one the most important considerations.
Calculation
Gross rental yield is commonly used, calculated as a gross percentage and is generally calculated before expenses are deducted. It is simple to calculate and allows you to easily compare properties with different values and rental returns, in order to assist when considering different investment options.
Gross rental yield = Annual rental income (weekly income x 52) / property value x 100
For example: A property purchase price = $400,000 & weekly rent = $350. Gross rental yield = (350 x 52) / 400,000 x 100 = 4.55% While the gross rental yield is a simple calculation, it's important to note that it doesn't take expenses into account. A property may have a high rental yield, but may also have high expenses, making the actual rental return low when these are taken into consideration.
If you do want a more precise calculation, you will need to know (or estimate) the total expenses for the property, including both purchase and transaction costs (property purchase price, stamp duty, legal fees, pest and building inspections, any startup loan fees, etc.) and annual costs such as vacancy costs (lost rent and advertising), repairs and maintenance, managing real estate agent fees, home and contents insurance, strata levies (if applicable), rates and charges etc.
Net rental yield = (Annual rental income – Annual expenses) / (Total property costs) x 100
A high net rental yield means a great cashflow for investors, which helps to improve your total return on investment.