As a property investor, it's useful to understand the definition of basic terms and metrics to help evaluate the potential of an investment.
In this post, we will summarise how to work out rental yield for a potential property investment.
Rental yield measures the 'gap' or difference between the income being generated from an investment property versus the overall costs required to support the investment. This is generally calculated in 'gross' terms.
The rental yield is calculated by adding up the total estimated annual rent for an investment property divided by the value of the property - this gets multiplied by 100 to produce a percentage value.
Lets use an example to illustrate this - lets say Jimmy has found a potential investment property which generates a weekly rent of $450. Lets also say that Jimmy is willing to make an offer of $390,000 for the property, which he believes will be accepted by the vendor.
This means the rental yield is ($450 x 52) divided by ($390,000) which equals 0.06. Multiplying 0.06 by 100 gives us a 6% gross yield. This is considered a reasonably good yield, however the overall net cashflow will be dependant on the interest rate and ongoing costs such as strata.
As a 'rule of thumb', a gross rental yield of 6-7% is quite a solid yield, however these types of yields are more often found in regional areas, or areas outside key CBD districts of our major cities.
