Understanding the rental yield for potential property investment opportunities is a crucial component of the exciting process of buying an investment property. So, what exactly is rental yield, and how do investors determine what is considered ‘good’ or ‘bad’?

What is rental yield?

Put simply, rental yield is a measurement of the money you make on a property investment.  

There are two types of rental yield:

• Gross rental yield - The total annual income you earn from the property divided by the property’s value (aka your income before expenses). 
• Net rental yield - The annual income you earn from renting out the property minus the ongoing expenses, such as water rates, insurances, maintenance and repairs. This excludes mortgage repayments. 

For current investors, this is a crucial measurement to know about your investment property as it is used as a benchmark for identifying the profitability of your investment. If your gross or net yield is low, this may suggest your property is overvalued, and vice versa for a very high yield. 

If you have not yet purchased a property, by knowing the rental yield of an area you’re considering purchasing in, you have a better idea of the return (if any) you could earn on your investment. A bad rental yield for one suburb may encourage you to purchase in an area with a higher rental yield.

This is part of the due diligence that investors must do when preparing to add a new property to their portfolio. 

What is a good rental yield?

There is no one ‘good’ rental yield figure, as rental yield is determined by the property type, vacancy rates, the location of the property, and its features and amenities. What you consider is a good rental yield for your property and your investment goals may not be the same for another property owner. 

Big four bank, Westpac, states that:

• A low rental yield is generally between 2-4%
• A high rental yield is generally between 8-10%

You may assume that the higher the rental yield the better, but again, it could indicate the property is undervalued. On the other hand, a higher rental yield generally means your cash flow is smooth and even, giving you more to invest with, or inject back into the property to boost its value. 

If you pay a pretty penny to nab your investment property, you may need to aim for a high return to pay for the higher ongoing costs you’ll need to budget for. This means that targeting higher rental yield areas is one of your priorities when searching for your investment property. 

Most significantly, it’s important to remember that property is another type of investment option, and that a good return is never guaranteed. The property market and rental market can, and will, fluctuate - especially over a 20-30 year mortgage (if applicable). If vacancy rates are high, for example, you may find that your property goes weeks without tenants, and therefore you earn less rental income. 

For example, at the time of writing vacancy rates are very low, and rental prices are at “historic” highs. That being said, the latest CoreLogic data (January 2023) shows that the national gross rental yield is currently 3.22%.  

Gross rental yields are also higher in the combined regions than the combined capital cities, which sit at 4.15% and 2.96% respectively. 

How do you calculate rental yield?

Calculating gross rental yield 

Gross rental yield is quite straightforward to calculate yourself. You simply divide your annual rental income (your weekly rent multiplied by 52) by the property’s purchase cost, then multiply this figure by 100 to find the percentage. 

For example, an investor purchased an investment property worth $700,000 and they rented it out for $550 a week. 

• Annual rental income is $650 x 52 = $33,800
• Investment property cost was $700,000
• 33,800 / 700,000 x 100 = 4.8%

The gross rental yield is 4.1%.

Calculating net rental yield 

Calculating net rental yield can take a little longer, as you’ll need to take stock of all your ongoing expenses, then subtract these from your rental income. These costs can include:

• Maintenance and repairs
• Insurance costs
• Strata fees
• Council rates
• Water rates (if paying)
• Legal fees
• Vacancy costs

Now, you take the same formula above and subtract these expenses from the rental income. 

• Annual rental income is $650 x 52 = $33,800
• Annual expenses are $6,000
• Investment property cost was $700,000
• 33,800 - 6000 / 700,000 x 100 = 4.0%

The net rental yield is 4.0%.

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