Investments
Asset class - property
Rental yield
One way to compare rent from different properties is to calculate their rental yield.
The gross rental yield (before expenses) is the annual rent divided by the cost of the property.
For example, if you bought an investment property for $300,000 and the yearly rent was $15,000 – the rental yield would be $15,000 divided by $300,000 which would give a yield of 5% (0.05).
Usually, the more important yield is the net rental yield.
A property may have a high gross yield (before expenses) however the net rental yield (after expenses) may be low if expenses are high.
Outgoings for property can include expenses such as rates, interest on borrowings, repairs or management expenses.
So in our previous example if there were $3,000 of expenses, the net rental yield would be $12,000 (i.e. $15,000 – $3,000) divided by $300,000 – which gives a net rental yield of 4%.
