Do you own an investment property or are you looking to acquire one? Have you considered what return this investment may yield?
If you are considering property as an investment, or if you currently own one, you may have already wondered what returns you might expect from your investment. One simple way to measure a return on property investment is by working out the rental yield.
Basically, rental yield is a measure of how much cash (income) an asset produces each year as a percentage of that asset’s value. Therefore, the rental yield for a property is generally represented as a percentage of the rental income, relevant to the purchase price.
Rental yield can be calculated as a gross percentage (before expenses are deducted) or as a net percentage (after expenses are deducted).
Gross rental yield is the most commonly used calculation, as it is simple to determine and allows for an easy comparison.
To calculate Gross Rental Yield:
Annual rental income / property purchase price x 100.
So, let’s assume you have purchased a property for $520,000 and the weekly rent is $485 the calculation will be:
($485 x 52) / $520,000 x 100 = 4.85%
To determine net rental yield you need to total your annual expenses, such as Body Corp fees, insurance costs, agent fees, rates etc.
To calculate Net Rental Yield:
Annual Rental Income – Holding costs/Purchase price x 100
Using the earlier example of a property purchased for $520,000 and weekly rent of $485 including the proposed annual holding costs of $5,800, the calculation will now be:
[($485 x 52) – $5,800] / $520,000 x 100 = 3.73%
By measuring the rental yield of a property, you’re better placed to understand if it is the right decision for your investment goals, or if you could earn a higher rental yield with a different property or perhaps by investing in another suburb.
Quick tip: If you have an investment loan, the interest isn’t usually included when calculating net rental yield. That’s because it relates to your own financial situation and the return the property may generate.
Of course, there are other factors that should be considered, such as potential capital gain, your attitude to risk and your overall objectives before any investment property purchase decision.
Rental yield is just one factor you should consider when building your rental portfolio.
By: Donna Sutherland – Manager Walshs Finance