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One of the key ingredients to successful property investment is achieving a strong rent return. But what exactly is rental yield and how do you calculate this vital measure of investment performance. Here's everything you need to get in the know.
The foundations of successful property investment include a number of key choices, including location, property type and whether to choose a new build versus an established property.
And one of the major considerations should also include identifying properties that offer a good rental yield.
The measure of rental income performance from a property is one of the two components that influences the wealth you can build from a property investment. The other key measure is capital growth, which is the increase in your property’s value over time.
Yield measures the profit you generate from your property annually as a percentage of its value. You can calculate this using the 3 simple steps below:
Multiply your weekly tenant rent by 52 (to get your yearly income)
Divide your yearly rental income by your property’s purchase price.
Multiply your rental yield amount by 100 to get a percentage.
Your rental performance is the immediate return on your investment because it provides you with an income stream as soon as you lease the property to tenants
As a general rule, rent percentages of 4 - 5% and above are currently considered to be good yields in Australia.
However, different property markets across the country have different yields. The higher demand markets may have higher yields, while in lower demand markets, the yield is likely to be lower.
Let's look at some examples.
Let’s say you are looking at a property that has a purchase price of $800,000 and a weekly rent of $800.
Step 1: $800 x 52 = $41,600 (yearly rental income)
Step 2: $41,600 divided by $800,000 = .052
Step 3: .052 x 100 = 5.2% (this is your rental yield percentage).
Is the yield percentage more important than the actual rental amount?
Yes, from an investment perspective it is. It’s important to convert your rental yield to a percentage because this allows you to see your true return on investment. It’s possible for a property that generates a higher yield than another to have a lower yield percentage (and vice versa).
Let’s look at another example.
The property in example 1 had a purchase price of $800,000 and weekly tenant rent of $800.
Let’s imagine there’s another property available for $700,000 that has a weekly tenant rent of $730. If you do the 3-step calculation, its rental yield is 5.4%.
On the surface, the $700,000 property is a better investment. However, to be sure, you should also compare other ongoing property costs, such as: council rates, insurance, body corporate fees and any potential repair and maintenance costs, plus the lower priced property’s potential for capital growth.
Now you understand the calculation, let's look at how to find a high yield property.
This includes looking at the two major influences on rental yield: property purchase price and rental income earning potential. Identifying a well-priced property to buy in a market where there is high tenant demand will help you to generate a higher rental yield.
The next biggest factor for a high rental yield is the type of property.
A multi-income property includes duplexes, dual income (also known as dual key), co-living and those with a granny flat. These properties offer the ability to generate more than one rental income from the one investment to help maximise your return on investment.
At DPN, we offer a range of multi-rental investment options, such as dual income homes, duplexes and co-loving properties that return extremely high yields, due to the fact they deliver multi rental incomes.
For example, one of our clients is currently earning 7.6% rental yield in Paxton, New South Wales. You can read about their success story (and those of other property investors) here.
Contact us to find out how you can invest in property with a high rental yield. We offer a complete end-to-end service that includes property investment strategy, research, property finance, access to high quality, multi-rental homes and ongoing property management.
A high rental yield on your property investment will help you to maximise your return.
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