Yield Explained
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When you hear a Real Estate Agent or property investment 'expert' claiming a % rental yield, they will be referring to the gross rental yield of a property. Now this can be deceiving and far from what your actual yield will be.
The gross yield of a property is it's expected/actual annual rental income divided by the purchase price. For example:
Lets say you buy a property for $300,000 - That property is leased for $410 per week ($410 x 52 weeks = $21,320 pa) then your gross yield is 7.1% ($21,320/$300,000 = 7.1%).
Purchase Price $300,000
Rental Income pa $21,320
Yield 7.1%
This gross yield does not account for a number of factors that are important to consider when analysing an investment property.
The net of actual yield is much preferred as it takes into account ALL of the associated costs of acquiring and holding the property such as:
- Stamp Duty
- Management Fees
- Council Rates
- Services (if you pay them)
- Holding costs
Now let's break down the example above to calculate the net or actual yield.
Purchase Price $300,000
Stamp Duty $13,000
Management Fees (7%) $1,529 pa
Council Rates/Levy's $1,590 pa
Services (Water) $1,100 pa
Holding Costs (20% deposit @ 4.29%pa P&I over 30 years) $14,244 pa
Net cost $331,463
Rental Income $21,320
Actual yield = $21,320/$331,463 = 6.4% pa
The difference between these two types of yield calculations can be profound and I strongly recommend using the latter if you can. The more detailed your analysis is, the more accurate your finances will be.
