Investing in rental properties is a popular strategy for generating passive income. However, understanding how to calculate the yield on your rental property is crucial for making informed investment decisions. This article will guide you through the process of calculating both gross and net rental yields, helping you to assess the performance of your investment.
What is Rental Yield?
Rental yield is a measure of the income generated by a rental property as a percentage of its value. There are two main types of rental yield:
- Gross Yield: This is the total annual rent received before any expenses are deducted.
- Net Yield: This is the annual rent after subtracting all operating expenses, providing a clearer picture of the property's profitability.
Calculating Gross Yield
Gross yield is relatively straightforward to calculate. Follow these steps:
- Determine Annual Rental Income: Multiply the weekly rent by 52 (weeks in a year).
- Divide by Property Value: Take the annual rental income and divide it by the current market value of the property.
- Multiply by 100: Convert the result into a percentage.
Example:
● Weekly rent: $600 ● Annual rental income: $600 x 52 = $31,200 ● Property value: $800,000 ● Gross yield: ($31,200 / $800,000) x 100 = 3.9%
Calculating Net Yield
Net yield gives a more accurate reflection of your property's profitability by accounting for all expenses. Here’s how you calculate it:
- Calculate Annual Rental Income: As above, multiply the weekly rent by 52.
- Subtract Annual Expenses: Deduct all annual costs, including rates, insurance, property management fees, and maintenance costs.
- Divide by Property Value: Divide the net income by the property's value.
- Multiply by 100: Convert the result into a percentage.
Example:
- Annual rental income: $31,200
- Annual expenses: $5,000
- Net income: $31,200 - $5,000 = $26,200
- Property value: $800,000
- Net yield: ($26,200 / $800,000) x 100 = 3.28%
Importance of Using Current Market Value
When calculating yields, it’s crucial to use the current market value of the property rather than the purchase price. This approach provides a more accurate measure of your investment’s current performance. Property values can change significantly over time, and using outdated values can mislead you about the true yield of your investment.
Tools and Calculators
Numerous online calculators can simplify these calculations. Websites like Opes Partners and Mortgage Lab offer detailed rental yield calculators that factor in various expenses and provide both gross and net yields. These tools can help you quickly assess potential investments and compare different properties.
Factors Influencing Rental Yield
Several factors can impact the rental yield of a property:
- Location: Properties in high-demand areas like Wellington or Auckland typically offer lower yields due to higher property values, but can benefit from capital appreciation.
- Property Type: Apartments might have higher yields compared to houses, but they often come with additional costs like body corporate fees.
- Market Conditions: Changes in local rental demand, property values, and economic conditions can affect yields.
Practical Tips for Investors
- Compare Properties: Use both gross and net yield calculations to compare different investment opportunities.
- Consider Future Expenses: Account for potential increases in expenses, such as maintenance and insurance, which can impact net yield.
- Monitor Market Trends: Keep an eye on local market trends and adjust your rent accordingly to maintain a competitive yield.
By understanding and calculating rental yield accurately, you can make more informed decisions and optimise the profitability of your rental property investments.