If you are considering investing in property, “rental yield” is a term you have probably begun to notice popping up into conversations and readings around assessing a property’s investment potential. Here are some basics to help you understand what rental yield means and how to calculate it.

The property investment dream is to secure a high yield abode in a location that delivers large capital gains, a strong rental return and low management and maintenance costs. Whilst rental yields are certainly not the only consideration being able to calculate rental yield to compare properties will assist you in your purchasing decision.

Yield is a measure of how much cash an asset produces each year as a percentage of that asset’s value. Yield is calculated differently depending on the type of asset but for property, the yield calculation is the percentage of rental income for the purchase price.

Rental yield can be calculated as a gross percentage, before expenses are deducted, or as a net percentage, with costs accounted for. Gross rental yield is most commonly used as it is simple to calculate and lets you compare properties with different values and rental returns easily.

Gross rental yield = Annual rental income (weekly rental income x 52) / property value* x 100

* Can be purchase or market value

In the below example the rental yield is 4.55%

Property purchase price = $400,000

Weekly rent = $350

(350 x 52) / 400,000 x 100 = 4.55%

Whilst the gross rental yield is a simple calculation to use it’s important to note that it doesn’t take expenses into account. A property may have a high rental yield but may also have high expenses making the rental return low when taken into consideration.

If you do want to want a more precise calculation you will need to know (or estimate) the total expenses of property including both purchasing and transaction costs (property purchase price, stamp duty, legal fees, pest and building inspections, any start up loan fees, etc.) and annual costs such as vacancy costs (lost rent and advertising), repairs and maintenance, managing real estate agent fees, home and contents insurance, strata levies (if applicable), rates and charges etc.

Net rental yield = (Annual rental income – Annual expenses) / (Total property costs) x 100

There are several factors to consider when investing in property depending on your unique situation and your goals. Contact me if you have any questions or to discuss your situation.

HOT TIP: Increasing the yield of your property (by increasing rent) will not only increase your cash flow but also potentially increase the value of your home. Stay tuned for next months The Insider for tips on how to increase your rental returns!

Source: http://www.loanmarket.com.au