Article by Davina Deluao
If you’re looking to invest in property you may have heard the term ‘rental yield’ thrown around. Not sure what it is or why it’s something you should consider when buying an investment property of your own? Read on. In this article, we will unpack what rental yield is, how it’s calculated and why it’s a valuable tool in evaluating the potential of an investment property.
Essentially it indicates the amount of money you could earn from renting out an investment property compared to its purchase price. Through calculating your rental yield, you can assess how much you are profiting and it is a valuable tool for both residential and commercial properties.
There are two different types of rental yield:
Gross yield includes solely assessing the annual rental income and property value.
Net yield encompasses all other property expenses in the calculation. These can include insurance, repair costs, legal fees, mortgage payments, maintenance, stamp duty and more.
Although it can be more tedious to collect the specific bills and information, working out the net yield paints a more accurate picture of what you’re getting back. This can be advantageous when planning out your investment portfolio and what is worth keeping for the long term.
At first glance, all the numbers can feel overwhelming but breaking it down into simple steps can ensure you are getting the correct amount.
For totalling the gross rental yield, you will need to divide the total annual rent with the property value. Multiply that figure by 100 and you’ll be able to get the gross yield percentage.
Meanwhile, the net rental yield requires subtracting the total property fees and expenses from the annual rent. After reaching that amount, you’ll then divide it by the property value. Similar to before, you’ll multiply by 100 to find the net yield percentage.
A high yield property is where the amount of rental income being delivered is higher than the costs of ownership. The specific location of your investment has a huge role in achieving a good rental yield and can also point out if you have a reliable source of income, as property values continue to fluctuate. There are ways you can look at increasing rental yield.
According to 'Mortgage Choice’, investors are generally aiming towards a rental yield above 5.5%, with metropolitan areas reaching gross rental yields around 3 to 5% and regional areas gaining gross rental yields of 5% or more. Although there isn’t a fixed rental yield percentage to achieve, it is still an incredibly helpful tool to have and one of the many ‘must haves’ to consider when looking for a property as an investment.
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