What is rental yield? A guide for property investors

What is rental yield? Everything property investors need to know.

Rental yield is a measure of whether you are making or losing money on an investment property. It is a percentage figure based on how much rent you make minus the cost of owning the property.

The higher the percentage, the more cash flow you are making on your investment property. In contrast, a negative yield represents a potential negative cash flow.

There are two types of rental yield: gross rental yield and net rental yield.

Gross rental yield considers the annual rent earned and measures it against a property’s market value, represented as a percentage. Unlike net rental yield, gross rental yield doesn’t reflect any outgoing property costs.

Net rental yield is similar but accounts for property expenses like water bills, agent fees, and insurance. It is based on annual rent minus property expenses against home value represented as a percentage.

Net rental yield is more accurate than gross yield because it considers outgoing costs associated with property management which can be expensive.

How to calculate rental yield? What is the rental yield formula? Let’s look at an example

There are two ways of calculating rental yield, including gross rental yield and net rental yield.

Calculating gross rental yield is easier than net rental yield. Multiply your weekly rent by 52 to get the annual rental income, then divide it by the property’s purchase price. This will give a decimal which needs to be multiplied by 100 to generate the gross rental yield.

Gross rental yield example

• Natalie has an investment property worth $600,000
• She rents it for $600 a week ($31,000 annually)
• Natalie’s gross rental yield is 5.2% (31,000 / 600,000 x 100 = 5.2%)

Net rental yield example

Natalie wants a more accurate figure and decides to calculate the net rental yield on her property. This will involve considering the expenses associated with owning and maintaining her rental, including insurance, vacancy costs, repairs and maintenance, and agent fees.

She can use the same formula from above to calculate net rental yield but needs to minus property costs from her rental income.

• Natalie has a net rental yield of 3.1%
• ($31,000 - $12,000 / 600,000 x 100) = 3.1%
  

Is having a high rental yield good? What is a good yield on rental property?

Generally, a higher rental yield is considered better because it indicates positive cash flow and a return on your investment.

The national average gross rental yield is 3.8%, according to CoreLogic’s July 2023 Quarterly Rent Review report. Noting this varies greatly across location and property type, a rental yield above this figure could be considered ‘above average’.

However, it is important to consider rental yield is only one measure of your investment property’s performance.

Let’s imagine you have an investment property that has increased in value. Your rental yield will likely decrease despite this capital growth. This is because rental yield reflects income relative to property value and any rental income is technically less measured against the property’s value.

Properties lower in value are associated with lower rental yields while the opposite is true for more expensive property. Hence, when considering rental yield, it is essential to consider other measures such as return on investment.

Apartment vs. houses which has better rental yield?

Nationally, units have higher gross rental yields (4.61%) than houses (3.6%). This is because units are less expensive and could be more attractive to tenants seeking flexible lifestyles.

It is important to remember a higher yield is not always correlated with a better investment.

Both units and houses have pros and cons. High-yield units can produce greater cash flow while houses outperform units when it comes to long-term capital growth.

Always seek professional advice before making an investment decision.

Where should I invest for a good rental yield? Where has the best rental yield?
When seeking to invest for strong rental yields, rural and regional areas tend to have higher yields than cities where properties are more expensive.

For capital cities, Darwin has the highest gross rental yield at 6.44%. At the suburb level, Kambalda West, an ex-mining town with a population of 2,500 has the highest rental yield of 12.15%.

Lesser-populated cities with lower house values such as Darwin and Hobart have higher gross rental yields while Sydney and Melbourne have higher yields (3.2% and 3.9% respectively).

Table: Average gross rental yield

How can I boost my rental yield?

You can boost your rental yield by charging more rent or making your rental more appealing to ensure it isn’t vacant.

Raising rent is perhaps the easiest way to increase one’s rental yield. However, you must be mindful of local laws and regulations around rent increases. In most states, rent increases are allowed only every 12 months. There are also minimum notice periods for rent increases.

Table: How often can landlords increase rent?

Is a negative rental yield bad? What about Negative gearing?

A negative rental yield means the expenses of your rental property are greater than the income you are making off the property.

Losing money on an investment may sound bad, but some investors buy rentals with negative yields to make long-term capital gains.

In Australia, negative rental yields can be a tax deduction thanks to negative gearing.

Negative gearing refers to when the expenses associated with an asset are greater than the income earned from it. For example, if you rent your property for $500 a week, but pay $600 on the mortgage, you are negatively geared.

Negative gearing can be an attractive option for investors because the net loss can be used as a tax deduction to offset your tax payable. This applies to other types of investments in Australia.