When investing in a property, there are various measures which need to be taken into account to assess the quality of your investment. Chances are you’ve come across one of the more important terms – “rental yield”. As an investor it is important to understand rental yield and how it can impact the success of your investment and your cash flow.
What is a rental yield and how is it calculated?
A rental yield is the rate or percentage of rental return compared to the value and costs of the investment property.
There are two ways you can calculate rental yield – either as a gross percentage before expenses are deducted (Gross rental yield), or a net percentage which will take into account expenses, such as purchasing and transaction costs, fees and expenses, and vacancy costs. (Net rental yield).
Because a gross rental yield does not take into account costs and expenses, it is a less accurate measure. However a net rental yield isn’t always 100% accurate either as it is based on assumptions about external factors out of the owner’s control (such as vacancy periods and mortgage interest rates).
It is important to engage with a professional when calculating rental yield to get it right.
What can rental yields tell us about the market?
Rental yields are a great indicator of the market. The below chart illustrates Australian capital city rental yields today versus 15 years ago. We can see that Sydney and Melbourne – the country’s biggest rental markets – have continued to provide lower yields than other cities.
At the moment we are experiencing record low yields in Sydney due to rising property values, which many debate is an indication that Sydney house prices are nearing their peak – something which will come as a relief to many with the median house price now reaching in excess of $1 million.
Source: Dividend, 2016, http://dividend.net.au/property-rental-yield-calculator/
Why high yields should be approached with caution
You know the saying “if it seems too good to be true, it probably is”? The same applies with rental yields. Property is easily affected by both economic and noneconomic factors and high rental yields alone may not be an indicator of a good investment.
Analysing rental yield is important, but an investor should never hang their hat on this one significant indicator – it’s important to look at the entire picture before making any purchasing decisions. Rental yield should be added to the mix of other factors including property location, potential capital growth, as well as new and existing infrastructure in the area to determine the overall potential return of a property.
To discuss your property investment options, contact me on 0403 324 905