Understanding the fundamentals of investing in property is crucial to the success of a rental return income strategy.
The rental income you can expect from an investment property is determined by several factors, including location, the type of property, presentation, supply and demand, demographics of the area, and overall economic conditions.
One fundamental concept that should be factored into your investment considerations is a rental yield percentage.
A rental yield is the amount of money you make (or profit you generate each year) on an investment property by measuring the gap between your overall costs and the income you receive from renting the property expressed as a percentage of the purchase price or current value.
Investors use a rental yield to evaluate the income and profits from their investments and compare returns on properties.
Understanding and knowing how to calculate a rental yield can provide investors with a benchmark indicator on the return a property will earn, which can be helpful when setting your investment goals, purchasing a new property or when it comes time to review the rent.
The higher the rental yield percentage, the greater the cash flow. However, selecting a property based on a high rental yield alone can sometimes have consequences. A high-yielding property can come at the cost of little capital growth or increased risk depending on the circumstances.
A good gross rental yield has traditionally been anything between 5% – 8%.
However, with rapidly rising property prices, rental yields for investors have been declining across most capital cities, while in contrast, many regional areas have been on the rise.
There are two ways to calculate rental yields; gross and net.
A gross rental yield is the total annual rental income received, expressed as a percentage of the property value.
(Annual rental income/property value) x 100
$460 per week X 52 weeks = $23,920 / $420,000 x 100 = 5.69% Gross rental yield
A net rental yield is calculated after deducting expenses and vacancy costs from the rental income.
(Annual rental income – expenses and vacancy costs) / property value) x 100
$460 per week X 52 weeks = $23,920 – $3,115 = $20,805 / $420,000 x 100 = 4.95% Net rental yield
What is the rental yield on your property?
As mentioned, the rental yield is not the sole defining indicator of a property’s overall value, viability, and worth of an investment. If you find that your rental yield is low, it may be time to get creative and look at ways to increase your profits by improving the property and increasing the rent.