Sometimes gross rental yields are calculated as a percentage of the original purchase price, rather than the market value. This can affect the outcome. For example, if you used an original purchase price of $400,000 in the example above, the gross rental yield would be 6.5%.
Overall, the gross rental yield offers a simple way to compare properties quickly. It gives you an overview of how the rental income compares to the value of the property and how likely it is to generate a positive or negative cash flow.
However, it does not take expenses into consideration. For that reason, a lot of investors use the net rental yield as a more accurate way of assessing returns.
Net rental yield = [(Annual rental income – Annual expenses) / Total property cost] x 100
The net rental yield offers a clearer indication of whether you can afford an investment property, as it factors in your expenses. To work it out, you’ll need to calculate or estimate your total property costs and total annual expenses.
Total property costs could include:
- The purchase price/ market value
- Stamp duty
- Conveyancing fees
- Building and pest inspections
- Loan establishment fees
Total annual expenses may include:
- Property management fees
- Rates and water charges
- Strata levies (if applicable)
- Mortgage interest repayments
Example: A property with a weekly rent of $500 ($26,000 a year), total property costs of $500,000 and annual expenses of $5000 would have a net rental yield of:
= [($26,000 – $5,000)/ $500,000] x 100 = 4.2%.
Calculating the net rental yield can be tricky, given you need to understand the costs of buying and running an investment property. If you’re stuck, please get in touch with a qualified accountant to help you crunch the numbers.