A guide to rental yield
Rental yield, the term used by investors to calculate the return (ie the money in your back pocket) they will get on a property, is probably the most important aspect of property investment.
No-one invests in property with the intention of losing money, so calculating the rental yield on a property is one of the first things an investor must look at when considering purchasing a property for investment purposes.
What is rental yield?
Rental yield is the difference between the income you receive from renting out your property minus the overall costs of your investment. Usually expressed as a percentage, the higher the percentage generally means greater cash flow and higher return on investment.
There are two different types of rental yield:
- Gross rental yield
Gross rental yield is a simpler calculation that looks at the amount of rental income you can receive over a year, measured against the market value of the property. It is calculated by dividing the annual income (rent) by value of the property and then multiplied by 100.
- Net rental yield
This is a more detailed calculation and is the one you will use to know how much you’ll actually receive in your back pocket.
Net rental yield factors in all the ongoing expenses of your investment property, such as mortgage interest, strata fees, maintenance, council rates and landlord insurance.
It is calculated by adding up all your outgoing expenses, and taking this figure away from the annual rental income.
What can affect rental yield?
There are many factors that affect rental yield; properties in a desirable location, such as next to the beach, proximity to good schools, jobs and amenities all attract a higher rental income, but properties in these locations often come with a higher price tag, and hence more outgoings.
Sometimes you may get a better yield in the next suburb along simply because you’ve paid substantially less for the property, and you’re not paying as much in terms of interest on your loan.
Another factor is the condition and age of the property. It stands to reason, a property in good condition will attract a higher rent than one which is looking tired and worn, and older properties may incur more maintenance costs.
Once you’ve assessed what the yield will be for the property as is, other ongoing variable factors that affect yield include:
- Interest rates
This is very pertinent at the moment! If you’re on a variable interest rate mortgage, if the rates go up, it stands to reason your rental yield will go down. This is because you now have more expenses in the form of interest, and the annual rent raise does not sufficiently cover this cost.
- Vacancy rates
If the property is sitting empty, there is no income. So, ideally, you want a long-standing tenant (to avoid the costs associated with finding new tenants) and ideally, there should be as short a time as possible between tenants (to avoid extended periods of time without an income). At 2.2%, Newcastle vacancy rates aren’t too bad compared to other areas of Australia – and we’re proud to say, our vacancy rates are consistently lower, and currently is at less than 1%.
Other points to consider
A high yield indicates a good cash flow, a good return on investment (ROI) and more money in your back pocket. Furthermore, financial institutions also usually looking favourably on a good cash flow and ROI, and are more likely to approve loans so you can purchase your next property!
Some argue it is better to have a high rental yield, but having a low rental yield isn’t necessarily a bad thing. Like everything in property, it depends on your strategy, your financial situation and the reasons why you’re investing.
For instance, a lower rental yield in an up and coming area may result in better capital gains a few years later. Some investors prefer to have low rental yield for tax purposes too.
We always advise to speak to your accountant or financial specialists so you know exactly what to consider for your financial situation and your property investment strategy.
If you’re interested to know more about rental yield and what else you should consider in an investment property, call us on 02 4956 9777, send us an email to mail@newcastlepropertymanagement.com.au or better still, come into our Cardiff office so we can talk more.
We can also explain how our property management services can reduce stress and save you time.