The purpose of any investment is to attract a financial return, whether it be in the form of regular income, or through a rise in market value over time. Understanding what rental yield is and how to calculate it can not only help you understand how your investment property is tracking financially, but can help you narrow down which property options are potentially going to give you the strongest return.
Specialist Disability Accommodation (SDA) offers some of the strongest rental yields available in Australia’s property market, so it only makes sense that a prospective property investor would want to understand what rental yield is, and how to calculate it.
We’re happy to provide this short guide to understanding rental yield so that you can make an educated investment decision.
How to measure investment performance
The primary objective out of any investment (property or otherwise) is to generate a financial return. When it comes to calculating your return, you can either consider how much the market value of your investment has grown in value over time (its ‘capital gain’ or ‘capital growth’) or you can look at your income yield (how much income the investment has made you).
Within property investment, your income yield is the level of rental return that’s made from your property tenants paying rent.
The difference between gross rental yield and net rental yield
Gross rental yield refers to how much income your investment property has generated over the course of a year. Whereas net rental yield can be thought of as the profit that’s been made from the investment property — the gross rental yield minus any expenses that have been paid against the property.
Generally, gross rental yield and net rental yield are both represented as a percentage of the property’s value. So for example, you may see a property advertised towards investors, with a 4.77% yield. This means that before expenses, the property generates almost 5% of it’s total value in income every year.
Calculation for rental yield
Calculating net rental yield has some extra steps to calculating gross rental yield, so we break down how to calculate rental yield, below.
To calculate gross rental yield:
1) Calculate the total amount of rent you charge on the property, annually.
2) Then, divide that rental amount by the total property value.
3) Finally, to represent the yield as a percentage, multiply that figure by 100.
So for example, if you’ve purchased an investment property for $800,000 and you’re charging $750 weekly rent, you would calculate the rental yield as:
$750 x 52 weeks of the year = $39,000 (which is the annual rental income)
$39,000 divided by the property value of $800,000 = 0.04875
That figure x 100 = 4.87
Therefore, your property would generate 4.87% gross yield.
To calculate net rental yield:
1) Calculate the total yearly costs of the property. Property expenses might include maintenance costs, legal fees, strata levies, council rates, and interest charges and fees on your investment mortgage.
2) Next, calculate the total yearly rent.
3) From here, subtract your annual expenses from the annual rental income.
4 ) Divide that figure by your property value.
5) Lastly, similar to above, you multiple the end result by 100 to represent your net yield as a percentage.
What is a good rental yield?
What constitutes high rental yield really depends on the market, and of course, where you’re looking at investing. Different suburbs will of course have a different benchmark for average rent. A leading online property sales company cited recently that a yield between 3 – 7% is considered a high rental yield. However, this again depends on several factors, including where you’re looking at buying and your overall investment goals.
Whether you’ve sought professional advice before investing or not, most property investors will have some sort of investment strategy that underpins their goals. For example, some investors will look to implement negative gearing (which is where the total expenses exceed the annual income) and instead focus more on the capital growth and ongoing return.
How to choose an investment property with higher rental returns
Choosing where to invest is going to be impacted by several factors, primarily your own financial situation. How much cash you have, your lending capacity, the overall costs of the property, your resultant cash flow and your investment strategy will all play a large part in understanding which rental property to choose.
Afterall, a property with the same purchase price, asking the same rent, in the same suburb, may perform very differently over the long run in terms of upholding it’s market value.
If achieving strong rental income is front of mind for your property investment goals, then you may like to consider a specialist disability accommodation property. Not only do SDA properties generally achieve higher rental yield than most other properties both on the residential and commercial property markets, but you provide multiple people living with extreme functional impairment a forever home.
If you’d like to understand more about how you can achieve benevolent outcomes for society and rental yield between 10 – 20% pa, talk with Apollo Investment — we are SDA investment specialists who can guide you on a more meaningful property investment journey.