What is rental yield and how do you calculate it?

Most investors seek to maximise their return on investment, so why would it be any different when we talk about rental yields from an investment property? 

From ensuring you’re advertising your property at the right price for future tenants, to finding the right investment home loan for your needs, there are plenty of tips and tricks to making the most of your rental yield. 

Rental yield is the profit you receive from rental income after paying your expenses (e.g. maintenance and repairs). It is usually expressed as a percentage. 

Calculating your rental yield can:

• Help you compare returns on different properties
• Determine whether an investment is worth keeping
• Review how much rent to charge your tenants
• Measure the performance of your investment properties over time.

There are two ways to calculate rental yield: gross or net yield.  

Gross rental yield vs net rental yield

Gross rental yield describes the rental yield you earn before expenses, whereas net rental yield accounts for your costs and paints a more accurate picture of your situation. 

Calculate gross rental yield 

1. Find your annual rental income by multiplying your weekly rental income by 52
2. Divide your annual rental income by the property’s value 
3. Multiply that number by 100 to get the gross rental yield as a percentage. 

For example, if you purchase a property worth $750,000 and receive a rental income of  $35,000 annually, your gross rental yield would be 4.67%.

Calculate net rental yield

1. Find your annual rental income by multiplying your weekly rental income by 52
2. Add together all of your property expenses (e.g. management and maintenance costs, strata fees, home insurance, property taxes) 
3. Subtract your property expenses from your annual rental income to get your net income 
4. Divide your net income by the property’s value 
5. Multiply that number by 100 to get the net rental yield as a percentage. 

For example, if you purchase a $750,000 property and receive an annual rental income of $35,000 but have $5,000 worth of expenses, your net rental yield would be 4%. 

Factoring in your property ownership expenses gives you a more accurate estimate of your rental yield. But what counts as a property expense?

• Repair and maintenance costs 
• Property management fees
• Council rates 
• Home insurance 
• Depreciation 
• Strata fees 
• Vacancy costs 
• Building inspection fees.

Note: Investment home loan repayments aren’t usually included when calculating your rental yield.

The answer to that is subjective. Typically, the higher your rental yield is, the better. After all, it can mean more cash in your pocket.

That being said, there are cases where a rental yield being ‘too high’ (8-10%) could indicate that the property is undervalued, or ‘too low’ (2-4%) if it’s overvalued. So, keep that in mind when you crunch the numbers. 

Ultimately, your rental yield will align with your investment strategy and goals.

What is the average rental yield in Australia? 

The average rental yield in Australia for Q3 2024 is 4.98%, according to Global Property Guide.

To improve your rental yield, you want to find ways to either increase your rental income or decrease your expenses. Here are some tips you can use to help boost your yield: 

1. Research rents in your area. First off, make sure you’re pricing your rent according to comparable properties in your area. If you’re under or over charging, adjust the rent – within reason, of course. 
2. Maintain your property. By keeping your property in excellent condition, from clean carpet to fresh paint, you can boost the appeal of your property and attract tenants willing to pay a little extra to live in a well-maintained space.
3. Upgrade the bathroom (on a budget). Rather than replacing tiles, freshen up the look of your property’s bathroom with a fresh coat of tile paint, replace the shower head and tap heads with more modern attachments, and give the shower a good scrub. 
4. Make the kitchen shine. Like a clean bathroom, good tenants appreciate a spotless kitchen. Make sure your kitchen appliances are clean and functioning properly, the sink is shining, and there are no pests hanging about. 
5. Invest in appliances. Adding extra appliances to your property, like an air conditioning system or dishwasher, can increase the value of your rental.  
6. Provide additional storage space. Space comes at a premium in rental properties, especially in units. So, adding more storage space for your tenants, such as built-in wardrobes or space to store items in the garage, can be a big plus for some renters. 
7. Improve security. A secure property, fitted with working locks on windows and doors is a good start. But, for extra security, consider adding a burglar alarm system. While not all tenants will make use of security systems, it can be a big selling-point for those who want it. 
8. Business in the front (yard), party at the back (yard). A neat, well-maintained front yard provides street appeal, while a functional backyard is key for those that like to entertain outside or enjoy a spot of sunshine while working from home. Consider adding a BBQ and outdoor furniture to your rental property to increase its value.  
9. Be pet-friendly. Australia has one of the highest pet ownership rates in the world, with 69% of households having at least one pet, according to the RSPCA. By opening up your property to those with pets, you can attract a larger pool of potential tenants. Plus, your landlord insurance policy may even cover damage caused by pets.
10. Reduce street noise. Noise can drive potential tenants away from renting your property. By employing some cheap, noise-reducing fixes to your property. This can include installing door seals and thick curtains, which double as a way to keep the weather out as well. 
11. Track your expenses. Keeping track of how much money you’re spending on your property is important. Track each expense individually, using a spreadsheet and compare your costs over time.
12. Avoid vacancies. Raising your rent too sharply can cause good tenants to move out of your property, meaning you now need to find new tenants to move in, as soon as possible. This can be a slow process, leaving your property vacant while you still have to maintain it and pay your mortgage. Do what you can to keep your tenants happy and your investment profitable. The two can go hand-in-hand.

You’ll also want an investment home loan with a competitive rate and useful features in your corner. A lower rate could mean you pay less interest over the life of the loan, which could otherwise eat into your rental income and tank your rental yield. Whether you’re refinancing or buying a new property, compare investment home loans on Mozo.