What is a good rental return?
As a landlord it pays to understand how your investment stacks up in terms of its financial return. After all, the rental income you command from your property will likely offset the costs of a mortgage and may even see you generate positive cashflow from a property.
This return, or yield, is also something you should consider at the outset of investing in any property.
So what exactly is a good rental return?
Rental return explained
Rental return can be measured in two different ways:
- gross yield that simply looks at your rental income as a percentage of your property value
- net yield, that takes into account likely property expenses such as rates, insurance, repairs/maintenance, property management fees, mortgage repayments etc compared to your property’s value.
Therefore, calculating the gross rental return is pretty simple, while the net rental return is a little more complex.
Gross rental return calculation
The gross rental return simply sees you calculate your annual rental income, then divide it by the property’s value to determine a percentage.
For example, if a property’s weekly rent is $340 and its value is $360,000, it works like this:
$340 x 52 weeks = $17,680
$17,680 ÷ $360,000 = 0.049
0.049 X 100 = 4.9 per cent gross yield
Net rental return calculation
Net rental yield sees you subtract your annual expenses from your annual rental income, then divide it by the property’s value to determine a percentage.
For example, if a property is worth $360,000, its annual rental return is $17,680, but expenses including mortgage repayments add up to $10,000, it works like this:
$17,680 – $10,000 = $7680
$7680 ÷ $360,000 = 0.0213
0.0213 X 100 = 2.1 per cent net yield
What’s a good rental return?
Rental yield can vary over the course of a property’s lifespan as an investment, depending on the rental market, property values and of course expenses you may need to incur.
You may also be looking to ensure your rental property fulfils your financial purposes and they could vary too.
Some people might be seeking a positive cashflow (high rental yield), while others might be looking to negatively gear their property (low rental yield).
But generally, investors aim for a rental yield of about 5.5 per cent, which allows for the property to generate a stable income, without it being overvalued or undervalued.
Meanwhile, it pays to do your research and factor median rental yield into the equation for areas you might be considering.
This information is available from resources such as CoreLogic, and you can then compare any property you are considering using the simple calculations above.
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