How to calculate rental yield

If you’re thinking of buying an investment property, you’ll want to know what your return on investment could look like. 

This is where calculating rental yield can come in handy.

At its core, rental yield is the income you receive from your property (rental income) minus the costs associated with owning it (e.g. maintenance, repairs, property management fees). 

In other words, it’s your profit. 

Rental yield is expressed as a percentage. Like with other investments, the higher the number, the better your rental yield is. 

Why calculate rental yield? 

There are plenty of reasons why you should calculate your rental yield, including:

• To compare returns on different properties 
• To determine whether the investment is right for you
• To review how much rent you charge your tenants
• To measure the performance of your property over time. 

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

Gross rental yield is a snapshot of how much rental income you earn before expenses are considered. 

Net rental yield takes into account your property expenses and requires a bit more number-crunching, but it paints a more accurate picture.

How to 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. 

To calculate gross rental yield, take your annual rental income, divide it by the property’s value, and multiply it by 100 to get a percentage.

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

How to 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 you 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? 

Property expenses 

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

Often, you won’t include your investment home loan repayments as part of this calculation.

The answer to that is subjective. Usually though, 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’ could indicate that the property is undervalued, or ‘too low’ if it’s overvalued. So, keep that in mind when you crunch the numbers. 

Ultimately, a ‘good’ rental yield will align with your investment strategy and goals.

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 below, or check out our investing guides for more ways to get a better return on your investment.