How to Calculate Rental Yield – A Must For Property Investors
I was scouring the internet for interesting articles to read and I came across this one written by Jennifer Duke, the Editor of Property Observer and she has kindly given me permission to share it with you. Jennifer can be contacted via email [email protected] twitter @propertyobs or www.propertyobserver.com.au
Every investor should be able to work out some of the most crucial aspects of property investing themselves – like how to calculate rental yield – even if they’re not a mathematician or financially trained.
The Rental Yield
A number of rental yield calculators exist online, and while it’s definitely useful to be able to quickly have a machine spit out a number, it’s worth knowing the calculations that are happening behind the scenes.
What is it calculating?
Your rental yield is a quick number that lets you know how much rental return you are achieving compared to the asset’s value. A $500,000 property returning $200 a week will have a worse rental yield than a $200,000 property achieving the same income. Regardless of whether you invest for cash flow or capital gains, calculating rental yield is likely to be of interest to you.
How do I work it out?
Take your property’s purchase price, and the yearly rent (weekly rent times by 52). Divide the yearly rent by the purchase price and times the result by 100 to get yourself a percentage. This percentage is your rental yield.
If you haven’t purchased the property yet then using a rental estimate (from a property manager, or from your own comparisons made) and a price estimate should be able to give you a close comparison.
Purchase price: $500,000
Weekly rent: $495
Rental yield: 5.15%
If you are provided a rental yield ‘estimate’, always ask for the basis of the purchase price and rent assumed behind the calculation. Note that the common calculation, as above, does not allow for any vacancies at all. You should be aware of the likelihood for vacant periods and how this will affect the return.
A quick note
A number of readers regularly ask why the gross rental yields (the above calculation), rather than net rental yields are commonly used. Net rental yields can be useful for working out the minutiae of an investment, however gross rental yield is a broad-sweeping calculation that is comparable across investments and quickly provides a return that isn’t based upon an individual.
Everyone’s net will be different (as it depends on your LVR, taxable income, strata levies, and a number of other considerations) and therefore it isn’t practical for news outlets to use this figure unless in specific case studies. Similarly, costs can change over time and for reasons outside of your control (for example, increasing insurance premiums) as can the return (unexpected vacancies).
To calculate your net rental yield, take the annual expenses away from your rental income and then undertake the same calculation.