Are you keen to get into property investing, but are new to terms like rental yield, or capital growth? Not to worry – there are even some seasoned property investors who still don’t fully understand how to calculate rental yield or how it fits into the bigger picture. Yet, it’s a crucial component when making those all-important property investing decisions.
Rental yield is one of the measures property investors tend to use to assess the profitability of property investment. However, there is a multitude of other factors you should take into consideration when investing in property. Read on and we’ll explain why!
What is rental yield?
First of all, rental yield is essentially a measure of the return a property investment can provide each year as a percentage of that property’s original value. Properties with a high rental yield will give you a better rental return than properties with a low rental yield.
While rental yield can provide a great tool for comparison when looking at the potential overall return on a property, it’s important for property investors to look at the whole picture. For example, one property might have a better rental yield than another, but if it’s an older property it might end up requiring far more maintenance over the years. This might then significantly reduce its potential net rental yield.
A property might have a lower rental yield than another. But, if you’re looking to sell in 10-15 years, it might provide you with a much better long-term capital return.
Understanding how to calculate rental yield
So, how do you calculate rental yield? It’s fairly simple. The gross rental yield will simply be:
Gross rental yield = Your annual rental income (weekly rental income x 52) / property value x 100
So, for a property that was purchased for $800,000 in Sydney, where rental income is $550 per week, the rental yield would be ($550 x 52)/$800,000. Then multiply that figure by 100 to find out the percentage. In this case it would be 3.6%
To calculate rental yield properly, however, we need to take into account any fees and expenses relating to the property, such as strata levies, water and council rates, maintenance, agent’s fees, or insurance. So, removing those fees, the net rental yield will be:
Net rental yield = (Your annual rental income – Annual expenses) / (Total property costs) x 100
For this same example, your fees might be $10,000, in which case your net rental yield would be 2.3%. This probably isn’t the highest rental yield you could get, but if you’re buying in Sydney, you’re also likely to benefit from significant long-term capital growth, so you need to take that into consideration.
Why rental yield is only part of the picture
So now you understand how to calculate rental yield. That’s great, but the rental yield is only one consideration you need to take into account when investing in property. In fact, other factors are, arguably, even more important. When choosing a property investment, you need to take into account many other factors. These include how long you’d like to keep your property, if you’re planning on living there at some stage, and the age of the property.
In a perfect world, the dream property investment would have a high rental yield, be in a location with potential for long-term capital growth, and would require little-to-no upkeep. Of course, that’s the dream – the reality can be a little different!
As with any investment, research is key, including having a thorough understanding of all the costs and fees involved. They might include strata levies, property maintenance, council rates, and insurance. If a rental yield on a property is low, you might need to scrutinize factors like high strata levies or any planned property maintenance and consider if it will truly be a worthwhile investment.
We’re experts in the Sydney property market, and we have an in-depth knowledge of the suburbs that traditionally perform well as investment properties. We understand how to calculate rental yield but we can also help you identify other factors that might affect your rental return. To learn more about property investing in Sydney, click here.