If you’re looking to purchase a new property or evaluate the performance of a current property, there are some basic measurements that you need to know.
Yield is a regularly used measurement to demonstrate the income returned on an investment. Unlike capital growth, yield measures the rate of income return based on the property’s annual cash flow and its value. A property’s rental yield is a good indication of it’s likely gearing.
As a property investor, you should know how to calculate rental yield and what your yield should be.
In this article we will cover:
- What is rental yield
- Types of rental yield
- Gross rental yield
- Net rental yield
- What is a good rental yield?
- How does depreciation affect rental yield?
What is rental yield
Rental yield is the difference between your rental property’s income and expenses. This difference is then measured against the property’s value.
Types of rental yield
There are two key types of rental yield to consider and understand, gross yield and net yield.
Gross rental yield
Gross rental yield calculates the total rental yield before considering any expenses. It’s found using the annual rental income and the investment property’s value.
In practice: how to calculate gross rental property yield
Kim owns an investment property. She receives $40,000 per year in rental income and the property’s value is $800,000. The following calculation determines Kim’s gross rental yield of 5 per cent:
40,000 ÷ 800,000 x 100 = 5%
Net rental yield
Net yield considers the same elements as gross rental yield, but also factors in any property-related expenses. It’s important to consider net yield as it’s an accurate reflection of your property’s return. Some common expenses include property management fees, insurance, maintenance and repair fees, council rates and depreciation.
You may be surprised to know that interest repayments aren’t generally included in the net yield calculation. This is because interest repayments aren’t classed as a direct property-related expense. Instead, they are related to your own financial circumstances.
In practice: how to calculate net rental property yield
To determine her net yield, Kim factors in her annual property-related expenses that come to $10,000. The following calculation determines Kim’s net rental yield of 3.75 per cent.
($40,000 – $10,000) ÷ $800,000 x 100 = 3.75%
What is a good rental yield?
There’s no magic number when it comes to determining what is a good rental yield. It largely depends on the specific characteristics of the property such as location, value and your personal investment property goals.
Positive rental yields are favourable as they reflect a stable cash flow. It’s important to note that yield shouldn’t be considered solely on face value, you must uncover the elements behind the number and take a holistic approach.
According to the May 2020 Corelogic Hedonic Home Value Index, gross rental yields among Australia’s capital cities range between 2.9 and 5.8 per cent. While gross rental yield across the country’s regional areas range higher, at between 4.5 and 6.7 per cent. Insights such as these can prove beneficial when determining what a good rental yield is.
How does depreciation affect rental yield?
Property-related expenses are included in the net rental yield, resulting in a reduced yield compared to gross rental yield.
It’s key to remember that not all deductions you claim are a result from making a property-related expense. Depreciation is the second biggest investment property tax deduction after interest, and it doesn’t cost you any money.
Depreciation is the natural wear and tear of a building’s structure and its assets over time. It’s a non-cash deduction, this means you don’t need to spend any money in order to claim it.
BMT Tax Depreciation has been the most trusted specialist in the industry for over 20 years. We have completed more than 700,000 tax depreciation schedules for investors, Australia wide.
To start claiming depreciation on your investment property, Request a Quote or contact BMT on 1300 728 726.