Rental yields – what you need to know
Rental yield – essentially the rate of rental income returned against the costs of an investment property is a great indicator of a property’s investment potential. But you need to keep things in perspective when you factor it into your decision to purchase property.
Calculating rental yield
A good first step in examining rental yield’s impact on the investment potential of a property is to recognize that there are two types of rental yields, gross and net, and they are calculated differently.
In property, gross rental yield is calculated by dividing the annual rental income you receive by the property value, and then multiplying this figure by 100.
For example, if you collect $20,800 rent annually ($400 per week) and your property value is $450,000, it will look like this:
$20,800 (annual rent) / $450,000 (property value) = 0.0462
0.0462 x 100 = 4.622
The gross rental yield is therefore expressed as 4.622%
Presumably, the higher the rental yield percentage, the better, as it suggests a more efficient return on your investment – more bang for your buck.
Knowing a property’s gross rental yield is a quick way to make a rough comparison of how its rental returns fare with others in an area, but it does not give a full picture of the investment potential a property offers.